How does a debt consolidation loan work?
A debt consolidation loan can be obtained at the bank, a third-party loan company like Lending Club, or borrowed from a friend, co-worker, job or family member.
When you get a debt consolidation loan — you are borrowing money and using it to pay off all of your debt.
The point of getting a debt consolidation loan is to lower your interest rates and monthly payment, and make it easier to manage your debts by having only one loan to pay each month.
A debt consolidation loan, generally won’t hurt your credit score, and can actually help your credit to improve.
Keep in mind, when trying to get a debt consolidation loan the bank and different lenders that you apply with will run your credit each time you apply, putting a negative inquiry on your credit report. If you get approved for the loan and follow through on your plan — paying all of your other debts off with the loan — the positive effect of that action will outweigh the small downside of getting the inquiry on your credit report when applying.
Just make sure you are a good candidate for a debt consolidation loan before you just start applying everywhere. If you apply in multiple places for a debt consolidation loan and get rejected several times, now you just took a beating on your credit score for no reason. If you get rejected more than one time, stop, and analyze your situation before going any further down that path.
How can a debt consolidation loan raise my credit score?
After you get a debt consolidation loan and use it to pay off other debts, your credit score will go up. You are paying off possibly five or more other accounts that you’ve had for a while. Your credit utilization and debt to income ratios will improve and your score should significantly go up within 30-60 days after paying off all of your other debts with the new loan. If you pay down the balance on any one particular debt showing up on your credit report, your credit score will almost always improve, so if you pay off multiple debts at once you will see great improvement.
Debt consolidation loans are only one debt relief option. There are other debt relief programs available that include credit repair and where you could pay a small fraction of the total balance.
How do debt relief programs work?
Like with shoe sizes — “One size doesn’t fit all”; with debt relief programs — “One debt relief service will never be the solution for all debt problems.”