Debt Consolidation: What It Means and How It Affects Your Credit


Debt consolidation is defined as the process of combining multiple debts or loans into a single loan with more favorable interest rates, payoff terms and lower monthly payments. People use debt consolidation to pay off high interest credit card balances, student loan debt and other unsecured liabilities.

Consumers can often consolidate debt from high interest credit cards by transferring that debt to a new credit card that offers a lower interest rate or a zero interest rate for an introductory period of 30 days or more. Credit card interest is not deductible however which is why home owners often turn to an option like a home equity loan or home equity line of credit. The interest on this type of load is deductible and the interest rate is often lower than credit cards.



If you have student loan debt, you can apply to the U.S. Department of Education through studentloans.gov and see if you qualify for a debt consolidation loan from the Federal Government.

What Debt Consolidation Can Do To Your Credit Score

Consolidating debt can have a negative impact on your credit score at least initially. Credit rating companies give better ratings to consumers who have longer standing debts with more consistent payoff histories. Moving debt between credit card accounts is also viewed negatively. But if you pay your new credit card balance on time and consistently, your credit rating can raise over time.

Be sure to check your credit score frequently with services like Credit Karma, Experian and other credit monitoring companies. You can also get a free credit report from any of the three nationwide credit reporting companies. Just go to annualcreditreport.com which is the only authorized site for free credit reports.