If you have a 401(k) retirement account, you may also be able to borrow from that account to consolidate your debt. Finally, informal loans from family or friends don’t normally entail credit checks, so they won’t affect your credit rating, either.

Making the Loan Payment

A debt consolidation loan will definitely streamline the process for managing your debt. After combining all your old debts into the new loan, you’ll just have one payment to track and worry about each month. However, it’s still a payment, and you still have to make it. If you’re late on your debt consolidation loan payment, it could definitely hurt your credit rating.

In fact, not paying your debt consolidation loan on time can have a significant negative title loans Delaware impact on your credit in a very short period. When it comes to your credit score, payment history, meaning how well you pay your bills on time, is extremely important. Your ability to pay bills on time consistently comprises over a third of your overall credit score, the most significant of the five factors that the three credit-reporting agencies use to compute your score. One inadvertent late payment on your debt consolidation loan can drop your credit score quickly, and multiple late payments can sink it virtually into oblivion.

However, when considering debt consolidation, it’s important to note that payment history works both ways when it comes to credit. If you do consistently pay your debt consolidation loan on time, it can help improve a weak or average credit score. Many borrowers find that they become more consistent about making payments after consolidating their debts into a single loan, too. If you’re confident in your ability to repay a new loan and need something to help simplify all your monthly credit card payments, then a debt consolidation loan might be a good option for you and your situation.

Erasing Bad Debt

One way a debt consolidation loan can help to start repairing your credit is by erasing some of the “bad debt” that you have. Millions of borrowers have lost control of their finances and are in arrears on multiple debt accounts. In 2014, it was estimated that over 35% of Americans had some sort of debt that had gone into collection. Delinquent accounts can have a devastating effect on credit ratings. Debt consolidation loans can help borrowers dig themselves out of holes like this and get their finances in good order.

Borrowers who are seriously behind in debt payments can use their debt consolidation loans to pay off delinquent accounts. They can also take care of all the penalties and fees that have accumulated on these accounts. Restoring delinquent accounts to a zero balance will gradually improve the very important payment history score factor mentioned previously, and this can help put you on the path to improving your credit rating. The key word here, however, is “gradually.” It can take months or even years for your credit score to improve substantially after paying off a delinquent credit card or loan account. Don’t expect to use your credit for anything important immediately after paying off a delinquent debt.

Finally, if you do have significant delinquent debts, paying them off with a debt consolidation loan may not even be an option. Due to your bad debts, you may not have the credit required to get a debt consolidation loan in the first place. If that’s the case, you’ll need to make an alternative plan to address your outstanding debt and get back on track.