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

Debt consolidation is a good idea for borrowers with high-interest debts owed to multiple lenders. Whether or not debt consolidation is wise depends largely on if you can get a new loan or credit card that will save you money compared to the current cost of your debts. The simplicity of a single payment can be helpful, too.... read full answer

How Much You Can Save With Debt Consolidation

* Interest rates are from WalletHub data and total interest is calculated on a 2-year basis.

When Debt Consolidation Is a Good Idea

When it gets you lower rates

If you’re able to qualify for a new loan or line of credit with a lower APR than your current creditors are charging, consolidating the debts will reduce the overall cost of what you owe by slowing down the rate at which interest accrues. That in turn will help you pay off what you owe more quickly.

When you’re having trouble managing your payments

If you find yourself with too many individual debts that are hard to keep track of, and you risk missing monthly due dates as a result, consolidating can help simplify your finances.

When the fees aren’t excessive

If you have a credit score of 660+, you should be able to qualify for a personal loan with no origination fee. And some balance transfer credit cards for scores of 700+ have no balance transfer fees. Other loans and cards may charge fees that increase what you owe by 1% to 8%, which might make debt consolidation a bad idea.

When you can get enough funding

Depending on how much you owe and how high your credit score and income are, you might not qualify for a large enough loan or credit limit to accommodate all your existing debts. In that case, you might consider consolidating partially, or you might decide that opening a new account isn’t a good idea.

When you’re not about to make a major financial decision

In the long run, debt consolidation can help you get debt-free more quickly and raise your credit score. But it will cause short-term credit score damage from the hard inquiry required to open a loan or credit card. This could affect your approval odds or the rates you get for things like auto loans or mortgages for up to a year.

Bottom Line

In conclusion, debt consolidation is a good idea when it helps you get organized and obtain better rates. You can click on the button below to compare the best debt consolidation loan offers on WalletHub.

Debt consolidation is a bad idea if it does not save you any money. This happens when the interest rate on your new loan or line of credit ends up being higher than that of your existing debts, which mostly defeats the purpose of consolidation. In that case, the only benefit would be having all your debts in one place. Debt consolidation may be a bad idea in other situations too, like if you work with a misleading company or consolidate right before a major purchase.... read full answer

When Debt Consolidation Is a Bad Idea

• When the APR is higher than on your existing debts
• When your "debt consolidation" service is really debt settlement
• When you're about to buy a house or car

If your credit score is worse than when you originally took out your existing debts, it will be hard for you to find a consolidation loan with a good rate. It's a good idea to check your credit score before applying for any debt consolidation loan and to spend a few months improving your credit score if needed.

But even if your credit score is in good shape, you still have to watch out for the wrong types of companies, as well as make sure there aren't any major purchases in your near future.

Debt Settlement Services Disguised as Debt Consolidation

One major situation where debt consolidation is a bad idea is if you're using a "debt consolidation" service that actually turns out to be a debt settlement company instead. Rather than negotiating for a lower interest rate, debt settlement companies try to get your issuer to accept a lump sum and forgive the rest of your balance.

The problem is that debt settlement is a negative item that remains on your credit report for 7 years. In addition, debt settlement companies often have you avoid making payments to the lender for a while to get better negotiating power. That's very bad for your credit score, too. On top of all that, debt settlement companies can charge expensive fees.

Debt Consolidation Before a Large Purchase

Debt consolidation is a bad idea if you're about to buy a house or a car. Getting a debt consolidation loan or line of credit will damage your credit score in the short term because of the hard credit pull triggered by the application. Working with a debt consolidation company also damages your credit if you default during negotiations.

If you're about to make a major financial decision that requires a credit check, you want your credit to be as good as possible. However, at other times, debt consolidation can be a good idea. The credit score damage from applying for a debt consolidation loan is usually limited to 5 to 10 points, which you can rebound from after a few months of on-time payments.

You can predict how debt consolidation might impact your credit score by using WalletHub's free credit score simulator.

Consolidation loans do hurt your credit in the short-term because the lender will do a hard inquiry into your credit when you apply, dropping your credit score by 5 to 10 points, and your total debt may go up. But even though a consolidation loan will hurt your credit at first, it can lead to a much higher score over time.... read full answer

You can estimate how a debt consolidation loan might hurt or help your credit by using WalletHub's free credit score simulator tool.

How a Debt Consolidation Loan Can Help Your Credit

Ideally, your debt consolidation loan will have a lower interest rate than your original debts, which means interest will accrue less quickly and you will be able to get debt-free sooner. Paying off your debts in full will increase your credit score.

In addition, every month as you make payments on your debt consolidation loan, the lender will report information about the loan to the credit bureaus. If you always pay on time, you should see your credit score steadily increase over the life of the loan. If you miss payments or default on the loan, that would hurt your credit.