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If you’re struggling with debt, you’ve probably heard promises of quick fixes to wipe the slate clean.

As many have unfortunately learned, these promises typically fall flat.

The truth is, there is no way to get out of debt without paying off that debt. You may be able to reduce interest rates or improve terms, but you’ll still be writing a check every month.

Debt consolidation is one of those debt reduction practices that allows debtholders to bundle all of their outstanding balances into one loan, making it easier to make payments and to see actual progress made. But, as with any financial decision, debt consolidation has to be done right to be useful in the long term.

When you’re combining balances into a new loan, you’re basically refinancing all of your debts in one place, with a longer repayment period to allow you to keep monthly payments low. But you’re still responsible for repaying that money, and now you’ve just guaranteed that you’ll be paying off your loans for even longer.

Plus, when you apply for a debt consolidation loan, that new lender will run a credit check to approve you. And now that massive balance is being added to your credit report as a new loan. Yes, you paid off most of your existing balances, but now you have a new concern: does debt consolidation affect your credit?

When you’re getting your financial situation in order by reducing your debt, it’s equally as important to look to your future by improving your credit. Debt consolidation will affect your credit score, but maybe not in the way you think.

First – Check Your Credit

Whether your debt is minor or insurmountable, you should be familiar with your credit score and report. Americans are allowed one free report from each of the three bureaus each year, so order one or all to see what your accounts look like right now.

Understanding your credit before debt consolidation is crucial for two main reasons. First, your credit is ultimately what will help you get a debt consolidation loan or balance transfer credit card. If it is in poor shape, it may be hard for you to find loan options that make a big enough effect on your overall payment structure.

Also, taking an active role in protecting your credit is what will keep you out of debt in the long run. Your credit report reflects how much you owe, your credit limits, your minimum payments, your payment history, and more information to guide your financial management going forward.

The Good: When Debt Consolidation Affects Credit Positively

If you’re taking charge of getting your debt under control, then you’re probably taking similar steps to improve your everyday money management. Be proactive, responsible, and committed to prioritizing your debt repayments, and you may find that debt consolidation affects your credit in the right way.

1. On-Time Payments

The highest factor considered in your credit score is your regular payments. Perhaps you were struggling to make all of your payments by due dates when you had multiple loans, but you now can make on-time payments every month to your new loan. Credit score boost!

2. Decreased Credit Utilization

Another big factor in your credit score, credit utilization reflects how much credit you use compared to your credit limits. If your credit utilization is over the recommended 30% of your limits, consolidating accounts into one with a higher limit and better ratio can help you raise your credit score.

3. New Loan Types

If you’ve only held credit cards, then your score could see a boost if you consolidate your debts into a new type of loan. However, you need to keep your balance-free accounts rather than close them, so you maintain this ratio.

4. Your New Commitment

Ultimately, debt consolidation can affect your credit positively because you are now committed to financial accountability. If you adhere to your plans and have addressed the habits and problems that contributed to your original debt, your credit score will go up as your balance goes down.

The Bad: When Debt Consolidation Affects Credit Negatively

Poor money management may have contributed to your current debt, so if you don’t change your habits, you won’t make progress in reducing debt – and your credit score will continue to take hits. Should you decide to take out a debt consolidation loan, it’s crucial that you know what you are signing up for and you stay on top of your responsibilities.

1. Surprise Interest Hikes – And Higher Payments

What’s enticing about consolidating debt on a credit card is that you’ll be paying lower interest rates than before. But most of these credit card offers are just promotional periods for a particular space of time. If you have a 0% interest card with a year-long promotion, you may not be able to support the new payments when a 9% rate kicks in. That means late and missed payments, a growing balance, and a credit score drop for year two.

2. Too Many Applications

The application process for a debt consolidation loan is just like any other loan – lenders will look at your finances, predominantly your credit report and score, to determine the rates and terms you qualify for. Which begs the question, if you have poor credit, will you be eligible for rates low enough to make the consolidation worth it? Too many credit checks will hurt your score, and if you’re not qualifying for any of those loans, it’s making it harder for you to consolidate your debt.

3. Increasing Balances

You’ve paid off half of the balance on your card, so you can start using it again, right? Not if you want to get rid of your debt. Another downside of increasing your balance while paying off debt is that your credit utilization ratio will go up, and your credit score will go down.

4. Increased Credit Utilization

If you’re using a balance transfer card, but the card limit is only pennies above your balance, you’re using way more credit than you should be, and your score will be negatively influenced.

5. Closed Cards

When you’ve paid off your credit card debt, you may be tempted to cancel those cards

immediately – but doing so could hurt your credit. Instead, cut up cards and resolve not to use them, keeping account length and credit limits positively impacting your score.

The Final Word On Debt Consolidation And Your Credit

Ultimately, as with any financial decision you make, it’s your behavior that will dictate whether or not you see any changes – good or bad – to your credit score. When you are pursuing consolidation to get your debt under control, it is your responsibility to research the right loan terms that will help you save some money in the long run without overburdening your ability to pay today. If you are concerned about how debt consolidation will affect your credit, take some time to understand your credit report as it stands right now, so you can better understand how your debt reduction efforts may affect it.

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