Millions of people are struggling with their debt and can't seem to get out from under its weight. One option that some might consider is debt consolidation. Debt consolidation can help you reduce your debts and save money. How? When you consolidate multiple debts into a single monthly payment at only one interest rate, less interest accrues and it's easier to make progress. But is it worth it, and what does it do to your credit score? Here's what you need to know.

What is debt consolidation?

Debt consolidation is when you combine multiple debts into a single loan. You'll typically consolidate your debts into a single loan and then pay this monthly installment back to the lender. This can be a great way to reduce your overall debt burden and save money on interest payments. 

Consolidation loans typically come with a lower interest rate than you would pay on separate loans, which can be a cost-effective way to reduce your debt. 

Can debt consolidation hurt your credit score?

Most people think that getting a debt consolidation loan will drastically lower their credit score due to the hard pull added to their report. The truth is, credit inquiries/hard pulls only account for 10% of your total score; the benefits of getting your debt taken off your credit cards will more than balance the slight dip caused by a hard pull. So if you're wondering if taking out a loan will do lasting damage to your credit report, it won't. On the contrary, debt consolidation loans can help improve your credit score in a few ways.

First, it reduces the amount of debt you have overall. This will lower your credit utilization ratio, which is essential in determining your creditworthiness; it accounts for 30% of your overall score.

Second, consolidating your debts into one loan typically results in smaller monthly payments. This means that you'll have more money available for other things, like paying down your debt or investing in yourself.

Finally, consolidating debts can help improve your credit history because it shows that you're capable of taking on more responsibility and can manage your finances responsibly by making on-time monthly payments.

How can I qualify for a debt consolidation loan?

The best way to qualify for a debt consolidation loan is to have a good credit score—around 700 or higher. If you don't have a good credit score, you may be able to qualify for a loan if you can show that you're capable of meeting your monthly payments and have a solid repayment history.

The best way to find a lender is by shopping around and comparing rates. You can also contact your credit union or other lending institution to see if they offer consolidation loans. They may be more willing to work with you since you already have a relationship banking with them.

The bottom line

Overall, debt consolidation can be a great way to reduce your debts and save money. If you're considering debt consolidation as an option for reducing debt, it's important to understand the potential impact it has on your credit score before deciding if it's right for you.