If you are thinking about debt consolidation, you can eliminate the high interest on your credit card. However, many people are not comfortable with this strategy. The question is; can consolidation loans hurt your credit?
To answer this, we will share how debt consolidation can affect your credit score. Plus, we will also cover the debt consolidation practices. Let’s find out if Loans Hurt Your Credit.
What is Debt Consolidation?
Before we dig further, you have to know the basics of debt consolidation. In simple words, when you consolidate debt, you will get a new loan with fixed interest. A personal loan is the most common example of debt consolidation.
When you properly consolidate debt, it can boost your credit score. It can even improve the payment history. However, the grass isn’t greener for everyone. Most people start using this method without having the proper knowledge.
Cutting interest rates is good at some points. However, there are some disadvantages as well. You see, your money will go towards debt.
Bright does not offer debt consolidation loans but has two smart alternatives. Bright Credit Builder is a smart and easy way to boost your credit scores – with instant approvals, no additional fees and no credit check required. Bright Balance Transfer offers a low-interest line of credit designed to pay off your credit cards fast and saving you from high-interest charges.
How Debt Consolidation Can Affect Your Credit Score
So, can debt consolidation affect your credit score? To understand this, you have to analyze how effective it can be for a personal loan and balance transfer card. That’s why we will share some pros and cons in the next section.
With a Personal Loan
As we noted before, a personal loan is a common method to consolidate debt. It can give benefits when you have a good credit score. However, you have to face the negative impact of low credit.
Pros
- You can give a fixed interest payment.
- Good for decreasing the credit utilization ratio.
- Some personal loans come with special offers including direct payment and credit score monitoring.
- Lower interest than credit card debt.
Cons
- You have to pay loan fees.
- Exit fees can be a big challenge for debt
- Low-interest rates can have a negative impact.
- If you use all credit cards, the debt can increase in the future.
With a Balance Transfer Card-Loans Hurt Your Credit
Your credit card can transfer into a lower interest card. It happens when you have a good credit score. However, a balance transfer can have some disadvantages. If you fall below a good credit score, you have to pay extra fees.
Pros
- When you have an above 700 credit score, you can get a lower interest rate.
- Can lower credit utilization rate.
- You can get one monthly payment.
Cons
- You can get a lower interest rate for a limited period.
- You can’t make a transfer by using the same bank cards
- When you use the card for a purchase, you won’t get the 0% interest
- If you don’t make transfers within 60 days, you can get the 0% APR
Top Ways to Consolidate Your Debt and learn if Loans Hurt Your Credit
You see, there are some common ways to consolidate your debt. If this is your first time implementing this, you have to be more careful. That’s why we will share the basics of these top ways:
- Balance Transfer
It’s a popular way to consolidate your debt. In this case, you can transfer your credit to a balance transfer card with low or zero interest. However, it’s available for a certain period. And you can get it with a good credit score.
- Home Equity Loan
Home equity loans have low interest and can pay credit card debt. However, the closing cost is very high. Hence, you can also lose your home if there are some issues. So, be careful while taking this step.
- Personal Loan
A personal loan is the most common way to consolidate your debt. Hence, we also suggest newbies to choose this one. You can even boost your credit score by using this method. However, it also depends on your creditworthiness.
- Borrowing from Your 401(k)
401(k) loan is another common way to consolidate debt. The bad thing is it will cost you money. Moreover, they will charge a 10% penalty if you withdraw money before turning 59. So, if you have no option left, you can choose this way.
- Debt Management Plan
A debt management plan is a good option if you have a poor credit score. In this case, you have to choose a nonprofit credit counseling agency. They can give you a monthly payment strategy at a low cost. However, you have to close your credit card account.
However, you can also choose some alternative ways to get the best result. There are some pro services providers who can help you with AI-based financial planning. In this case, Bright can be your best choice.
Top Practices for Debt Consolidation
As we noted before, most people choose some common practices for debt consolidation. In this case, you have to choose the right strategy to get the benefits. Let’s find out about the best practices:
- Choose a Repayment Plan
If you don’t want to hurt your credit, stick to your repayment plan. For example, if you have a balance transfer card, make it a priority until the 0% interest period ends.
- Avoid More Debt
One of the best ways to control debt consolidation is by avoiding more debt. In most cases, people start comparing payments. However, it’s not the right way. You will lose more money by doing this.
- Shop Around For Offers
Before making debt consolidation, you have to do some research. Hence, you can also compare the offers. When you have good credit, you can get more offers such as personal loans, balance transfer cards, and home equity.
Conclusion
So, you can understand that debt consolidation can only give a positive impact when your credit score is high. However, it’s not recommended if you have a low credit score or you are using all credit cards. Still, if you want to implement this method, make sure you contact an expert.