Debt consolidation dramatically raises credit score

ATLANTA - Debt consolidation is a useful tool for climbing out of debt. It can be a benefit to credit scores and peace of mind, if you do it the right way. 

The key here is getting it right. A credit analyst with LendingTree, an online site that provides financing tools and loan searches, says taking out a personal loan to consolidate credit can significantly boost your credit score.

"The biggest benefit of consolidating your credit card debt is knocking down your interest rate," said Matt Schulz, LendingTree's chief credit analyst. And that’s especially important with the Fed seemingly raising rates nonstop here in 2022."

LendingTree analysis shows that when its clients paid off at least $5,000 in debt with a personal loan, the average credit score went up 38 points in a single month. Even if the borrower paid off less - between $1,000 and $5,000 - the score went up 17 percent on average in a single billing cycle. And, if you have a good credit score already, which is 720 and above, the savings for consolidating multiple debts into one personal loan saves you 14 percent in the long run.

If you have credit that ranges from good to excellent, getting a personal loan or even a zero percent interest credit card balance transfer, you can substantially knock down the interest you are paying every month.

"And if you can reduce your interest rate substantially it can significantly reduce the amount you pay in paying off that balance, and also the time it takes to pay it off. So it’s a big deal," added Schulz.

LendingTree offers a debt consolidation calculator so that you can see the advantages: Try the Math. 

But here’s where it can fail. If you don’t stop using your credit cards, you can make your credit situation worse. If you’re still charging things then you’ve added more debt to that loan or balance transfer.