If you are facing multiple high-interest debts and large monthly repayments, you might consider debt consolidation as a solution. Establishing credit may be a possible outcome of a consolidated debt, but there are many things to consider before you commit to a debt consolidation loan.

Let us see how debt consolidation affects your credit. Your credit score may drop slightly at the beginning. There may be two reasons for this. First, when you apply for a new letter of credit, the lender usually conducts a rigorous investigation of your credit history. This will appear on your credit report and may temporarily lower your score.

If you get approval for a new loan, this account will reduce the average length of your account in your credit history - this can have a small negative impact on your credit. But as your account expires, your credit should increase. The good news is that repaying loans on time helps increase your credit, so you must pay back on time every month.

Long-term improvement is possible

If you take the right steps, debt consolidation loans can help you improve your credit. Find a loan with an annual interest rate lower than your current balance. If you are eligible for a debt consolidation loan at a lower interest rate, your more payments will be used to pay off your debt, which will make it easier for you to pay off your debt faster. Paying off debt can also reduce your credit utilization, which helps improve your credit score.

Paying the minimum amount of the loan at least on time every month also helps build your credit. Debt consolidation loans can reduce the amount of debt you have to repay within a month, which may make it easier for you to repay debt on time, because you will have fewer records. If you have room for your budget, try paying more than a minimum amount of money each month – this can help you pay off your debt faster and reduce interest.

Things to consider before consolidating debt

You may get a bad credit loan. But to increase your credit through debt consolidation, find a lower interest rate than you are paying now and make sure you can pay.

Can you get a good interest rate?

Consolidating your debt is financially significant only if you can get a lower interest rate than the existing debt. But keep in mind that the best interest rates are usually offered to people with good to good credit. If your credit is not good, you may end up with a high interest rate, or you may not be eligible for the loan amount you need.

You can find a personal loan option with a lower interest rate or a more flexible credit requirement at a credit union or online banking. Some lenders will allow you to apply for pre-qualification to understand what interest rates you may qualify, and this should not harm your credit score.

Will you create more debt?

You may want debt consolidation to help you get out of debt. But to be successful, you first need to change the behaviors that make you indebted. For example, you may need to assess your spending habits, start budgeting, or temporarily stop using your credit card. Also, pay attention to the loan term. If you have a long time, you may pay more interest over time, which is more expensive for you.

Can you afford this money?

Before applying for a debt consolidation loan, double check your budget and calculate how much debt you can afford each month. If you have a loan but can't pay for it, you can consider credit counseling. Credit counselors can check debt management plans to help you set up a budget or help you contact your creditors to develop a repayment plan.