Do Debt Consolidation Loans Hurt Your Credit?

Debt consolidation loans can be an excellent way of alleviating financial anxiety or streamlining disorganized finances. In some instances, consumers may accumulate multiple debts over time and struggle to keep track of the various repayments. The result can be multiple missed payments, leading to a negative effect on your overall credit score.

By consolidating all your debts into one loan, the need to consider only one monthly payment significantly reduces the likelihood of missed payments. With the right interest rate, you may even reduce the overall amount paid back over the term of the loan.

The leading question that many consumers want to know, however, is, “Are debt consolidation loans bad for your credit?”

The answer is not a straightforward yes or no. It depends heavily on the terms of the loan as much as the individual consumer. In optimum circumstances, a debt consolidation loan is generally no different from a personal loan or an unsecured auto loan.

If payments are maintained, there will be no negative effect on your credit score. The ability to manage repayments over time may even boost your score.

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It won’t affect your credit if

  • First and foremost, you are committed to changing your financial habits, and you won’t continue running up credit external to your consolidated loan repayments.
  • You make your repayments on time and in full every month.
  • Consolidating all amounts results in a debt-to-credit ratio of 30% or less.
  • You can extend your lending history to include other loans outside of credit card debt, such as personal loans, auto loans, and so on.

It will affect your credit if

  • You continue to run charges up on your credit cards after you’ve consolidated your debt. This will leave you in a worse financial position than when you started.
  • You miss payments on your loan. As with any other loan, if payments are missed this will have a negative effect on your credit score.
  • You apply for multiple loans that you cannot service. Most lenders perform a soft credit check at the time of application based on the information you provided. This does not affect your credit. However, if you accept a lender’s offer, they will dig deeper and perform a hard credit check. This impacts your score negatively for a period of time and is an unavoidable part of any successful loan application. Only apply for loans you know you qualify for to avoid multiple hard credit checks.

Tips when considering a debt consolidation loan

Obtaining a loan with the right terms, conditions, and interest rates is vital to ensure maximum financial benefits.

  1. Choose a reputable lender that matches your credit score.
  2. For amounts in excess of $30,000, consider spreading it out over two smaller loans.
  3. Choose an optimum payment method that allows realistic and unpressurized repayments over a reasonable term.

So are debt consolidation loans bad for your credit? In short, no, so long as you don’t miss any payments and refrain from running up further lines of credit. Be honest with yourself, critically analyze your own repayment history, and ask yourself if a debt consolidation loan is the right option for you.

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