How to consolidate credit card debt without hurting your credit

What is debt consolidation?

Debt consolidation combines multiple debts into a single payment or line of credit. This can be done in multiple ways, such as a debt consolidation loan or balance transfer credit card.

It also simplifies the repayment process since you only have one payment to worry about each month. As you make regular payments on your debt consolidation, you establish a pattern of good payment history and reduce your debt. This improves your credit score.

Debt consolidation strategies to improve credit

Use balance transfers effectively

A balance transfer credit card allows you to transfer your credit card balance from one card to another, consolidating your credit card debt. There is often a 0% introductory annual percentage rate (APR) that can last up to 21 months, allowing you to pay down a considerable amount of debt before you have to begin paying interest.

However, there are often fees that accompany the transfer and interest rates can skyrocket after the introductory phase. You will also need a good credit score to qualify for the balance transfer credit cards with the best rates.

Consider personal loans for consolidation

A personal loan can be a great way to consolidate different types of debt. Known as a debt consolidation loan, it works similarly to a balance transfer credit card, allowing you to combine your debts into just one loan. They are often unsecured loans that require no collateral, and terms can be generous, often allowing you up to seven years for repayment.

The best rates are reserved for those with excellent and good credit, but you still may be able to get a lower interest rate than you are currently paying on your other debts. Consider the best personal loan companies to find the best offers for your loan.

Tap into a home equity loan or line of credit (HELOC)

If you are having trouble qualifying for a balance transfer credit card or personal loan, you may consider a home equity loan or home equity line of credit (HELOC). These loans are often larger than personal loans and can have lower rates than personal loans. They also typically give you longer for repayment than other types of loans.

You will need to have enough equity in your home to support the loan, which is typically 15% to 20% of your home’s value. It can also be dangerous because your home serves as collateral, which means it can be seized by your creditor if you default on your loan.

Explore debt management plans

A debt management plan is a repayment plan available through a nonprofit credit counseling agency that typically lasts between three to five years. Your credit counselor will work with your creditors to negotiate a payment plan that makes repayment more manageable. This could result in a lower balance, waived fees and even a reduced interest rate in some cases.

You simply make one payment to your counseling service, and then it distributes the funds to your creditors. Your counselor can also provide invaluable support with developing a budget and creating financial goals.

However, debt management plans are not available for all debts. They are typically limited to unsecured accounts, such as credit cards, and there are also typically fees for this service.

How does debt consolidation affect your credit

Debt consolidation can still affect your credit in a few ways:

• Credit inquiry: If you take out a new loan, your lender will usually run a hard inquiry that can be added to your credit report and negatively impact your score.
• New credit: New accounts, such as a loan or credit card, can temporarily impact your credit score since these newer accounts do not demonstrate credit history.
• Credit utilization ratio: Your credit utilization ratio, or how much credit you are using compared to available debt, also impacts your credit score. As you pay off debt, your credit utilization improves and your credit score increases.
• Credit mix: Your credit mix accounts for 10% of your FICO score and assesses the different types of debt you manage. This includes everything from loans to credit cards.

Pros and cons of debt consolidation

Here is a quick look at the pros and cons of debt consolidation.

How to protect your credit with debt consolidation

A temporary dip in credit score is normal with debt consolidation, but there are some things you can do to protect your credit and raise your score that much faster.

• Don’t miss a payment. Make your payments on time and in full to avoid further damage to your score. Plus, the faster you pay down your debt, the less debt you will have and the better your credit utilization ratio.
• Keep open lines of credit. This will show that you can manage the credit you have over time, while also improving your credit utilization ratio.
• Stop using credit cards. It is crucial not to take on new debt while you are trying to eliminate the debt you currently have.
• Do not open new accounts. Avoid opening any new accounts that can impact your credit history and ding your credit.