Is consolidating debt a good idea?

Debt consolidation is a good idea if your monthly debt payments (including mortgage or rent) don't exceed 50% of your monthly gross income, and if you have enough cash flow to cover debt payments. Debt consolidation isn't a quick fix for severe debt problems.

Does consolidation hurt your credit?

If you do it right, debt consolidation might slightly decrease your score temporarily . The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.

What are the drawbacks of a debt consolidation loan?

Cons You may not get approved for a lower interest rate. The interest rate you receive for any new loan or line of credit will depend on your credit score and credit report. ... You can face additional damage from late payments. ... Debt consolidation won't keep you out of debt.

Can I still use my credit card after debt consolidation?

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it . However, running up another balance could make it difficult to pay off your debt consolidation account.

How long does it take your credit to recover from debt consolidation?

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 .

Is debt consolidation a good way to get out of debt?

Taking out a debt consolidation loan can help put you on a faster track to total payoff and may help you save money in interest by paying down the balance faster . This is especially true if you have significant credit card debt you carry from month to month.

Does debt relief hurt your credit?

These programs aim to help reduce your debt and if that debt is revolving credit, it can reduce your credit utilization and improve your credit. However, a debt relief program could accidentally drop your score if it closes your account with the longest payment history .

Is debt settlement a good idea?

Credit score impact: Debt settlement can negatively impact your credit score , as settled accounts may be reported as “settled” or “charged-off.” A debt settlement may remain on your credit report for up to seven years. Creditor cooperation: Typically, lenders are unwilling to settle current debts.

What credit score do you need for a debt consolidation loan?

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680 .

Debt Consolidation Explained (2024)

There’s no one-size-fits-all solution to paying off debt. No matter what type of debt you have or how you accumulated it, establishing financial freedom requires finding a strategy that works for your unique situation. If you’re ready to get your life back on track, having debt consolidation explained in detail could help you figure out if debt consolidation is the best solution.

Debt Consolidation Explained

If you are saddled with unwieldy debt from multiple sources, you’ve probably wondered if debt consolidation could be the answer. This guide could help you find the answer.

How Does Debt Consolidation Work?

Debt consolidation involves rolling multiple debts into a single balance and monthly payment. This can be a big relief because it makes debt more manageable and less complex while also lowering the total amount that you have to pay.

The two most common types of debt consolidation are balance transfer and debt consolidation loans:

Balance Transfer: A balance transfer involves transferring all of your credit card balances to a new or existing credit card with a lower interest rate. In the long term, this reduces the amount you pay by decreasing the interest you pay over time. If you go for a 0% introductory rate, you can use the introductory period to make great strides toward paying off your debt. However, you will likely need good to excellent credit to qualify for such a card. You may also have to pay fees to transfer your balances, and the interest rate may jump drastically after the introductory period.

Debt Consolidation Loan: A debt consolidation loan involves taking out a loan to pay off your credit balances and making monthly payments on the loan over a set term. This can be a great option for people that aren’t able to take advantage of a balance transfer, as the threshold for approval is a lot lower. While borrowers with better credit scores qualify for the lowest interest rates, most consolidation loans will offer a more favorable interest rate than you are currently paying on your credit cards.

Will Debt Consolidation Save Me Money?

Because debt consolidation reduces the amount of interest you pay over time, you will save money in the long run. In addition to the long-term savings, consolidation can mean lower monthly payments, leaving you with more money in your pocket.

What’s the Difference Between Debt Consolidation and Debt Resolution?

Debt resolution is a different process than debt consolidation. While debt consolidation involves taking out a lower interest loan to pay off all of your debt, debt resolution involves working with creditors to settle for a lower, lump-sum payoff.

Can I Trust Debt Relief Companies?

It depends. A good debt relief company will present all of your options to help you create a comprehensive plan for long-term financial health. But while there are debt consolidation companies that have your best interest in mind, there are others that make lofty promises to take advantage of you.

It’s important to trust your intuition and do your research. When assessing debt relief companies, check out their reviews on independent watchdog resources, such as the Better Business Bureau, and make sure they’re accredited by the American Association for Debt Resolution (AADR).

While having debt consolidation explained to you may have helped you decide if debt consolidation is the best way to pull yourself out of debt, it’s critical to ensure that you partner with the right debt relief company. Their support can have huge benefits for your future.

The Right Debt Relief Partner

At National Debt Relief, integrity is at the heart of everything we do. Our team of experienced advisors works with you to forge a path toward a debt-free future and guides you every step of the way.
Founded in 2009, National Debt Relief has helped over 450,000 Americans like you pay off their debt and create financial success. We’ll help you create a realistic and powerful debt resolution plan that works for your unique financial situation—whether that includes debt consolidation or not. With an A+ rating from the Better Business Bureau and glowing reviews from our clients, we’re a partner that you can trust and rely on.

Do you want debt consolidation explained further? The team at National Debt Relief has the information you need. Get a free, no-obligation consultation today to see if debt relief is right for you.

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Timi Joy Jorgensen, PhD

Academic Panel Reviewer

I am passionate about improving financial wellbeing through financial education, financial mindset management, and decreased financial stress for all people. So, I partner with like-minded professionals and organizations to improve the wellbeing of specific audiences through research, inclusion, partnership, and innovation.Learn more about our academic panel

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