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With just under half of all Americans carrying credit card debt, it’s no surprise that people often have questions about debt consolidation and how it will affect their credit. Whether debt consolidation will benefit you depends on a few contributing factors, including how you intend to consolidate your debt and how much you can afford in monthly payments. For example, consolidating debt with a personal loan can reduce your monthly payments. However, depending on loan terms, you can end up paying more in interest over time. Let’s consider two common ways to consolidate debt.

Consolidating debt with a personal loan

The most common way to consolidate debt is to take out a large enough personal loan to pay off all of your credit cards. Personal loans generally offer lower rates than credit cards. Coupled with an extended repayment period, a personal loan can significantly lower your monthly expenses compared to making all those individual credit card payments. This is also likely to give your credit score a good bump up, as your percentage used of available credit will drop significantly.

There is a down side, though. If you use a personal loan to pay off your credit cards, make sure you stop using those credit cards. Don’t just cut back; stop using them completely. Otherwise, you may quickly find yourself in more financial trouble than you were before. 

Consolidate with a debt settlement company

If you’re more concerned with eliminating debt than you are with preserving your credit, you may want to consider working with a debt settlement company. These companies negotiate with your creditors to forgive a portion of your balances and accept lower payments. You make one payment to the debt settlement company and they make payments to your creditors accordingly.

One problem with debt settlement companies is that they’ll only work with you if your payments are delinquent. That’s what gives them leverage to negotiate with your creditors. The thinking is that if you’re already not making any payments, the creditor would rather get at least something. That means that if you contact a debt settlement company when your payments are not delinquent, they’ll advise you to stop making payments so they do become delinquent.

The bottom line is that using a debt settlement company will lower your debt, but will also lower your credit score. That’s generally not a good idea.