Are Debt Consolidation Loans Bad For Your Credit? (Q&A)

By James Young on August 1, 2013
Are Debt Consolidation Loans Bad For Your Credit? (Q&A)

If you’re carrying a lot of debt, that probably means you’re also carrying a lot of stress: Maybe you’ve amassed so much debt that each month, you find yourself performing a juggling act just to try to cover all the amounts due, and a simple trip to the mailbox pushes your nerves to the limit. Or maybe you’re still able to handle your debt but you realize that it’s having a significant impact on your debt-to-income ratio and your ability to get a mortgage or qualify for other loans or credit.

In any case, taking a debt consolidation loan to pay off those debts can be a great option. Debt consolidation loan companies use the loan proceeds to pay off your existing debts, allowing you to pay one loan at a specific interest rate each month instead of trying to meet multiple obligations all month long. Often, consolidation loans offer better rates than many other types of consumer debts, meaning you can save money.

The primary disadvantage of debt consolidation loans is that many consumers end up using the loans to pay off their cards and then – lured by the sultry siren song of a $0 balance – they promptly begin to rack up debt on the cards, eventually winding up with even more debt – and much worse credit – than they had when they applied for their loan. Obviously, the key here is to have the willpower NOT to use your cards once they’re paid off. If you can’t trust yourself not to use your paid-off cards to amass more debt, these loans may not be a good option.

However, if you feel confident you can successfully avoid temptation, debt consolidation is certainly worth a look. Here are a few tips to consider when comparing companies:

  • Look for a company that’s been around and has received positive reviews from other clients (don’t be scared off by a few bad reviews; even top companies sometimes fail to meet people’s expectations).
  • Check the Better Business Bureau for complaints and/or awards.
  • Make sure the company has educational materials like articles or an informational blog so you can educate yourself about credit, budgeting and how to avoid debt.
  • Like any loan, debt loans can have a wide range of interest rates, monthly payments, penalties and other fees, so be sure to compare loan terms carefully to get the best deal.

Used wisely, debt consolidation loans can be a powerful way to jumpstart debt repayment and get your credit back on track. For best results, avoid using your cards once they’re paid off and be sure to CAREFULLY READ any loan documents before signing.

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About James Young

My name is James Young- I love red wine, sailing, and playing guitar. I believe that everyday is truly a gift. I'm blessed to live five minutes from the sand in the beautiful city of Long Beach, CA. When I'm not assisting homeowners, you'll find me belting melodies with friends around a campfire, wandering the halls of an art exhibit, or watching ESPN re-runs until the sun comes up. So what am I doing here, you might ask? In a couple of sentences- I'm passionate about empowering first-time and experienced home buyers to make their dreams a reality. Whether it's saving thousands on your home loan, buying your first home, or acquiring your first investment property, I'm always here to help. Don't hesitate to ask questions, and please remember to "share the love"! :) #loveloans #loverealestate #lovelife!