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Do consolidation loans hurt your credit?

Date:
October 14, 2021

When you apply for a debt consolidation loan, most lenders require a hard credit check, which can negatively impact your credit score, at least temporarily. But a debt consolidation loan can also help build a positive, healthy payment history.

How does applying for a loan impact my credit score?

Hard credit checks are common for loan applications. For lenders, each hard check represents a potential risk scenario, signaling you’re short on cash, can’t manage the debt you already have or are preparing to add a lot more. A hard check can remain on your credit report for about two years, potentially limiting your ability to access more credit.

But once approved, a debt consolidation loan can be a boon for your credit score - a credit tool that can help improve your credit history.

How do debt consolidation loans work?

Debt consolidation loans typically offer a lump sum, which you’ll use to pay off your credit card balances. Once your cards are cleared, you’ll make payments on your new loan instead -- payments which are usually predictable and, ideally, under a lower interest rate.

Monthly payments for debt consolidation loans are often predictable because the loans are usually offered with fixed rates. When you know your payment each month, it’s easy to include in your monthly budget -- and a great way to build a strong history of on-time payments.

Making regular, on-time payments on any loan is a great way to boost your credit score -- which can lead to more access to loans and credit cards. 

One more advantage to a debt consolidation loan: you’ll likely pay less in interest charges. APRs on credit cards can be some of the highest charged on any kind of debt, and it’s likely the APRs on your cards are high too. When looking for a debt consolidation loan, always ensure the APR is lower than the rate on your credit cards. Saving money on interest charges should always be a major benefit of debt consolidation.  

Another tip: look for personal loans designed for debt consolidation. Personal loans are usually installment loans, with fixed monthly payments and a fixed payoff date. That delivers the kind of predictable payments that make these loans easier to manage. 

In contrast, your credit cards have variable interest rates, which can shift month to month. As a result, your payments can change, especially as your usage and balances shift. And credit cards have no clear payoff date, which can extend the period you’re paying high interest rates. 

What credit score do I need for a debt consolidation loan?

When reviewing your application, most lenders will look for a credit score of at least 660. 

That’s considered just below a “Good” credit ranking, which ranges from 670 to 739. (Most consumers have a score above 660.) If your score needs a boost, look for opportunities to lower your balances or improve your on-time payments. You can also work with credit repair services, like the Bright Credit Builder. 

Who has the best debt consolidation loans?

A wide range of banks and lenders offer debt consolidation loans. Use the APR (or “annual percentage rate”) on each loan to compare what’s best for you. 

But keep in mind your credit score can impact the APR you’re offered -- and it might be very different from the rate a lender promotes to entice you. 

Most lenders offer similar repayment terms, requiring on-time monthly payments with penalties when you’re late or not paying in full. When reviewing your options, review the penalties closely. They should be clearly detailed. 

Most debt consolidation loans come with low or no fees -- an industry standard you should expect. Origination fees -- a charge intended to cover the cost of processing your loan -- should be low, if they’re charged at all. It’s typically added to your loan balance or included in your APR.

Use Bright Credit Builder or Bright Balance Transfer

Bright does not offer debt consolidation loans. But we offer two other solutions, Bright Credit Builder and Bright Balance Transfers. They’re smart alternatives, with competitive rates and built-in automation. 

Bright Credit Builder is an easy way to boost your credit score. Once you’re signed up, we’ll set up an interest-free, secured line of credit and use it to make automatic payments on your cards, building a positive payment history and lowering your credit utilization. Bright Credit Builder focuses on utilization and payment history because as they improve, your credit score goes up!

Bright Balance Transfer offers a low-interest line of credit designed to pay off card debt fast while saving you from high interest charges. Once approved, Bright uses the funds from your Bright Balance Transfer to pay off your high-interest cards, moving those debts to our balance transfer program with its lower APR. Over the months ahead, Bright automates your new repayments, too, so you pay less in interest and it’s hassle-free. Bright Balance Transfers offers credit lines of up to $10,000 at APRs starting from 9.95%, depending on your eligibility.

Bright can also help get you debt-free by managing your card payments for you. With a personal Bright Plan, we’ll use our patented MoneyScience™ to study your finances, learn about your debt and make smart payments, always on time and optimized to save you money and get you debt-free fast.

If you don’t have it yet, download the Bright app from the App Store or GooglePlay. Connect your checking account and your cards, set a few goals and let Bright do the rest. With a personal Bright Plan, you can apply for Bright Credit Builder or Bright Balance Transfer or use MoneyScience™ to pay off your cards fast.

MoneyScience™ Team
Bright Money

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