Debt consolidation
Is debt consolidation a good idea for you?
It can make sense when a single payment and a clearer payoff plan fit your budget. It may not help if the new terms cost more overall or spending continues. Before you decide, compare total cost, not just the monthly payment.
When it can fit
When debt consolidation may be a good idea
The Consumer Financial Protection Bureau describes a debt consolidation loan as money you borrow to repay separate debts, then pay back as one amount. That can be a reasonable fit in the cases below. If you want to check what may be available, start with debt consolidation prequalification or personal loan options. Both use a soft credit inquiry, and neither is an approval.
- ✓Several due dates are hard to track, and one payment would fit your budget.
- ✓You have compared the total cost, fees included and the full length of repayment, with what you pay on the debts you have now.
- ✓You have a plan to avoid new balances. The CFPB says a consolidation loan probably will not help if you keep spending more than you earn, unless spending or income changes.
- ✓You want to look first with a soft credit inquiry. Prequalification on this site has no impact to your credit score, and it is not a loan approval.
When it can miss
When it may not be
A new loan can also leave you paying more than you do today. The CFPB's consolidation guide flags the situations below.
- ✓A lower monthly payment may exist only because repayment lasts longer. The CFPB says that, once fees and the longer term are included, you might pay more overall than if you kept your current payments.
- ✓You would keep using the cards or loans the new loan paid off. The CFPB says a consolidation loan probably will not help you get out of debt if you keep spending more than you earn.
- ✓You have not read the fees and the full disclosures. Final approval, terms, and funding are subject to verification, underwriting, and lender approval.
- ✓The company tells you to stop paying creditors, or it promises to reduce what you owe for a fee. That is debt settlement, which the CFPB treats as a different product.
Credit
Does debt consolidation hurt your credit?
It can. The effect depends on whether you are only checking options, applying, or paying the new loan afterward. It is not one single event, and it does not promise a higher score.
Prequalification on this site uses a soft credit inquiry. The CFPB explains that soft inquiries do not affect your credit scores. For that prequalification step, this site states: No impact to your credit score.
A full application is a separate step. If you choose to proceed, a hard credit inquiry may be required and could impact your credit score. The same CFPB page says hard inquiries — the checks lenders often run after you apply — will impact your credit score, because scoring models look at how recently and how often you apply.
The loan itself is a new credit account. The CFPB notes that scoring models look at recent credit activity, and that applying for a lot of credit in a short time can look like financial trouble. One new account is not the same as many applications, but it can still appear on your credit report.
What you owe compared with your credit limits can change too. The CFPB says scoring models look at how close you are to your credit limit. Paying card balances down can lower that share. Closing cards, or moving balances onto fewer cards, can raise it, and that may hurt your score when you are using a high percentage of the limit you have left. Consolidation can move this either way.
Over time, payment history carries the most weight. The CFPB says most credit scores treat on-time repayment as the main factor. Payments made on time can help as that history builds. Missed payments can hurt, and the CFPB says negative payment history can stay on a credit report for up to seven years.
Not the same product
Debt consolidation vs debt settlement
The Consumer Financial Protection Bureau draws a line between the two. Debt consolidation is a loan you use to repay separate debts so you make one payment over time. You still repay that loan under its terms. Debt settlement is a service that, for a fee, tries to get creditors to accept less than you owe. The CFPB says settlement companies often tell you to stop paying, which can mean fees keep adding up, your credit is further damaged, and you are left open to debt collection and lawsuits. The CFPB also notes that forgiven debt could mean you owe taxes on the amount forgiven. Some ads that say consolidation may actually be settlement offers.
For a side-by-side look at fees, credit impact, and how each one works, see debt relief vs debt consolidation.
Before you decide
Questions to ask before you consolidate
Walk through this list before you agree to a new loan. The CFPB's point is to compare the full cost, not only the new monthly payment.
Total cost
What would you pay over the whole term, including fees, compared with keeping your current payments?
Fees
Which fees are charged, and are they shown in the disclosures before you agree?
Term
How long would you repay? Is a smaller monthly payment coming from a longer term?
Payment fit
Does that one payment fit your budget without new borrowing?
New balances
How will you avoid charging the paid-off accounts back up?
FAQ
Common questions
See if consolidation may be an option
Start with a secure soft-pull prequalification. No impact to your credit score.
Start Prequalification