But a few mistakes could actually hurt your credit or cost you more money in the long run.
How Does Debt Consolidation Work?
Debt consolidation usually means taking out a loan to pay off existing debts, most commonlycredit card debt.
These are technicallypersonal loansthat lenders often market as debt consolidation loans, which isnt inaccurate.
Its just their way of letting you know how they can help you.
Youll take out the loan, receive the funds and use them to pay off your credit card balances.
Then youll repay the loan over time like any other loan.
However, personal loans typically have the advantage of lower interest rates and no collateral requirement.
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Theyll each have a different effect on your credit score and apply to different situations:
1.
Debt Refinancing
Refinancing works like consolidation, but the term usually refers to paying off a single debt.
Refinance your debt if your credit and finances have improved since you first borrowed.
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2.
Debt Restructuring
Restructuring is more common for companies than individuals and usually happens in dire situations.
Do You Need Good Credit to Consolidate Debt?
Watch out for predatory lenders if you have a low credit score.
Some unscrupulous companies are willing to give you a loan you cant afford with a super high interest rate.
How Could Debt Consolidation Help Your Credit Score?
How Could Debt Consolidation Hurt Your Credit Score?
A few common debt consolidation mistakes could hurt your credit score or cost you money.
Dont exit the Paid Accounts
After you pay off credit cards, dont close every account.
Budget before you take out the loan so you know you’re free to afford the monthly payment.
Staying on top of the payments should help your credit score over time but getting behind will hurt.
Any longer, and youll have to pay interest and probably face a high interest rate and annual fees.
Compare Consolidation Options
Shop for the best debt consolidation loans before committing.
Online loan marketplacescan help you quickly see and compare personal loan offers from lenders side by side.
Just dont stick yourself with those bad terms for the long haul.
Many lenders specifically offer debt consolidation loans, but you dont have to consolidate that way.
Kaz Weida is a senior writer for The Penny Hoarder.
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