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Your Money: Can debt consolidation improve your credit score?

A debt consolidation loan can help you pay

A debt consolidation loan can help you pay down their debts, experts say, but you have to be ready to make changes in your behavior. Credit: Getty Images/iStockphoto/courtneyk

According to a new study from the credit reporting agency TransUnion debt consolidation loans  have benefits. The company found that, on average, consumers who get a debt consolidation loan pay down over 58 percent of their credit card debt with the new personal loan, lowering their average credit card balances from $14,015 to $5,855. That reduction led to a boost in credit scores.

Sounds like a slam dunk, but like all things financial, it can get complicated. Here’s what else to consider about debt consolidation.

Can you change your ways?

“Some people instead of avoiding further debt and committing to clear the consolidated loan, they apply for more loans with the freed credit cards and apply for more cards. Debt consolidation may also tie you in debt longer. Both of these tend to sink you into deeper and worse debt. Psychologically, the gained confidence about your financial situation may lead you to make mistakes that hurt the recovery of your financial health,” says Edith Muthoni, chief editor of personal investment site LearnBonds.com.

Her advice: Stick to the repayment plan and avoid further debts and the tempation to apply for new cards.

How you consolidate matters

Amanda Grossman, a certified financial educational instructor with  FrugalConfessions.com, shares what she learned while consolidating her student loans.

“Don’t consolidate a bunch of high-interest debts in with your low-interest debts. Consolidating everything together will actually raise the interest rate on a larger sum of money. Instead, consolidate to two separate loans or just consolidate the lower-interest rate loans together and continue paying off the higher-interest rate loans by themselves.”

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