What debt consolidation does
Debt consolidation means using one new loan to pay off several debts, often credit cards. You trade many payments, often at high variable rates, for one payment. Common options include a personal loan, a balance transfer card, a home equity loan or a cash-out refinance. Each one shows up on your credit a little differently.
The short-term dip
When you apply, the lender usually checks your credit. That hard inquiry can lower your score by a few points, and its effect fades over the following months. A new account also lowers the average age of your accounts, which can count against you a little at first.
These dips are usually small. If you're planning to apply for another big loan soon, ask your loan consultant about timing.
Why scores often rise afterward
Credit utilization is how much of your available card credit you're using. It's one of the biggest parts of most credit scores. When a consolidation loan pays your cards down to zero, your utilization drops, and your score often goes up once the new balances are reported.
From there, steady on-time payments on the new loan add to your payment history, which matters most of all.
Card debt vs. installment debt
Credit cards are revolving debt. A personal loan or home equity loan is installment debt, with a set payment and payoff date. Scoring models tend to weigh high card balances more heavily than an installment loan of the same size. That's part of why moving card debt to an installment loan can help.
Mistakes that undo the benefit
Consolidation only helps if the old debt stays paid off.
- Running your card balances back up after they're paid off
- Missing a payment on the new loan
- Closing several old cards at once, which can raise utilization and shorten your history
- Applying for lots of new credit in a short time
Using home equity to consolidate
A home equity loan or cash-out refinance can offer a lower rate than credit cards, with a fixed payment. CapCenter home equity loans have a fixed rate and ZERO Closing Costs (restrictions apply). The trade-off is that the debt is now secured by your home. If you can't make the payments, your home is at risk. Borrow only what you need, and have a plan to keep card balances low.
