Is It Possible for a Debt Consolidation Loan to Hurt Your Credit? Resolvly Explains the Pros and Cons
Can a debt consolidation loan hurt your credit? The short answer – “possibly” – is not very helpful. In this article, we’ll break down the types of debt consolidation loans from best to worst, point out the potential risks to your credit, and explain how Resolvly can help.
Debt Consolidation Types – and Their Effects on Credit
The purpose of debt consolidation loans is to lower your interest and group your debts together into one payment so that your debt becomes easier to manage. There are a few different types of debt consolidation loans, and each comes with its own benefits and risks.
1. Personal Loan
A personal loan moves your credit card debt to a loan program with a lower interest rate. (Please note that you can end up with high fees – make sure you understand the APR for this consolidation type.) Some personal loan plans have prepayment penalties.
A personal loan can boost your credit score by lowering your credit utilization. However, if you can’t make the monthly payments, then you could default and lower your credit score.
Personal loans can give you a better credit “mix” if you only have credit card debt. Credit companies generally prefer to see a mix of debt types as opposed to only significant credit card debt. However, if you spend more using the newly available space on your credit cards, you can end up with additional debt that defeats the purpose of the loan.
2. Balance Transfer Card
A balance transfer card moves your debts from your other cards to this single card. It charges zero or very little interest for a certain amount of time, which can enable you to pay your debts faster. However, after that initial period, balance transfer cards often have higher interest rates than your other cards. If you haven’t paid enough of the debt in time, you’ll be dealing with higher interest rates than before.
Balance transfer cards can be an attractive option because of their flexible payments, but because of the associated high credit utilization, this loan type can bring your credit score down.
3. Debt Management Plans
These plans can make your finances feel more manageable. However, they can lower your credit score during the time you are on this payment plan if you close credit cards or negotiate with your credit company to pay less. Simply talking to a credit counselor should not lower your credit score, but the fact that you are on a DMP will show up on your credit until the plan is over.
4. Retirement Account Loan
This acts like a personal loan, but you are borrowing from your retirement account instead. This is not recommended. If you cannot pay the loan back, you will have to deal with taxes and penalties.
5. Home Equity Loan
This debt consolidation loan uses your home as collateral. Because this is a secured loan, you receive lower interest rates, which can make paying debts easier. However, if you cannot pay, you will lose your home. This option is considered high-risk for most people.
6. Bankruptcy
As you might have guessed, this one is not a loan. However, some people do use bankruptcy to get out of debt. While it can help where immediate relief is concerned, bankruptcy can stay on your records for up to ten years and will have a big (and negative) impact on your credit score.
Get Your Debts Resolved Instead
Resolvly is a Florida Bar-approved lawyer referral service that helps clients nationwide connect with consumer protection attorneys that specialize in debt resolution. Founded in 2015, the Boca Raton-based company has become an industry leader by helping thousands of Americans find the right, legal-based solution to reduce or eliminate their unsecured debt.
Resolvly specialists help with credit card debt, personal loans, private student loans, business debt, medical bills, and vehicle repossessions – and they can help you understand how to stay out of debt in the future.
