How Debt Consolidation Affects Your Credit Score [2023] (2024)
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Debt consolidation — combining multiple debt balances into one new loan — is likely to raise your credit scores over the long term if you use it to pay off debt. But it's possible you'll see a decline in your credit scores at first.
Debt consolidation can negatively impact your credit score. Any debt consolidation method you use will have the creditor or lender pulling your credit score, leading to a hard inquiry on your credit report. This inquiry will decrease your credit score by a few points. However, this credit score decline is temporary.
Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.
The potential drawbacks of debt consolidation include the temptation to rack up new debt on credit cards that now have a $0 balance and the possibility of hurting your credit score with late payments. Also note that the best personal loans go to consumers with very good or excellent credit, so not everyone can qualify.
Debt consolidation doesn't automatically close your credit card accounts. But if keeping an account open tempts you to rack up more charges, then it might be a good idea to close the account. However, you might damage your credit scores by closing the account.
A debt consolidation loan may temporarily lower your credit score by a few points due to the hard credit inquiry. But, over time, consolidation could improve your score. You may find that it's easier to make on-time payments with a single consolidation loan each month versus multiple debt streams.
The timing varies depending on individual circ*mstances and the lender's policies. Generally, individuals may need to wait at least 2 years after completing debt settlement before applying for a mortgage. During this time, it's essential to focus on improving credit and demonstrating financial responsibility.
The short answer is Yes, people are generally allowed to use their credit cards after debt consolidation as it does not typically involve closing credit card accounts.
Summary: Ultimately, it's better to pay off a debt in full than settle. This will look better on your credit report and help you avoid a lawsuit. If you can't afford to pay off your debt fully, debt settlement is still a good option.
You might lose borrower benefits such as interest rate discounts, principal rebates, or some loan cancellation benefits associated with your current loans. Consolidating your current loans could cause you to lose credit for payments made toward IDR plan forgiveness or PSLF.
Debt consolidation is almost always the better choice. And while it doesn't change how much you owe, you might save by getting a lower interest rate. However, you usually need at least good credit for this tactic to work.
Debt consolidation is a good idea if monthly debt payments don't exceed 50% of your monthly gross income, and you have enough cash flow to cover debt payments.
There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.
Debt consolidation might be a good idea if you can get a lower interest rate than you're currently paying. That will help you reduce your total debt and reorganize it so you can pay it off faster.
Generally speaking, having a debt consolidation loan will not have a negative impact on your ability to refinance your home or obtain a new mortgage. In fact, it may actually improve your ability to qualify. One thing that a lender will assess during the mortgage or refinancing review is your debt-to-income ratio.
If you get approved for the card, the creditor will not require you to close your other cards. And even with a debt consolidation loan, you may only face an account closure restriction in some cases.
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