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Debt consolidation has the potential to help or hurt your credit score—depending on which method you use and how diligent you are with your repayment plan.
The strategy is considered in situations where people want to streamline the repayment of multiple high-interest debt amounts—often with the hopes of saving money and lowering their debt burden.
Credit counseling organizations are typically non-profits that exist to advise people on how to manage their money and establish budgets.
Sometimes, credit counselors work with you to develop a debt management plan and can also help you make your payments.
As you roll revolving credit debt into a debt consolidation loan, and if you keep your balances on those accounts low, this can help to reduce your credit utilization and in time help boost your credit score.
While you can consolidate many different types of existing debt, it is important to first know what the interest rate is on your current loan in order to see if debt consolidation will be helpful.
In the case of most medical debt, consolidation might not be the answer if you are hoping to save money on interest payments.
Medical debt typically has a very low interest rate, and in some cases no interest.
Closing revolving credit accounts will increase your overall credit utilization ratio—which will impact your credit scores.Payment history is the most important factor in calculating your credit score—accounting for 35% of your FICOWith a debt consolidation loan, it is important to first know what range your credit score falls into.For people with a "poor" credit score it may be difficult to get approved for a new loan to use for consolidation.People with "fair" to "exceptional" credit scores will have an easier time getting approved for a new loan, and will also be eligible for a lower interest rate.Knowing your credit score before you apply for debt consolidation loans will help you choose the right loan and avoid incurring multiple hard inquiries in a short period of time.
When you consolidate revolving debt—like credit card accounts—you also will be working toward reducing your utilization ratio—one of the most important factors in calculating your credit score.