Debt consolidation loans can help build credit, TransUnion study finds

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If you’ve got credit card debt, you may be able to pay it down and build up your credit with help from a debt consolidation loan.

That’s the key message from a recent TransUnion report, which says 68% of borrowers in a study saw their credit scores increase by at least 20 points after taking out debt consolidation loans. According to TransUnion, this is likely in part because consolidation lowered their credit utilization — something that can contribute along with other factors to healthier credit.

Perhaps more importantly, many people who took out debt consolidation loans tended to be keeping their credit scores on the right track a year later.

Here are some other key findings from the study.

  • People who get loans for debt consolidation reduce their credit card debt by an average of 58%
  • That results in an average drop in debt balances from $14,015 to $5,855
  • More than 60% of consumers who consolidated their credit card debt into a loan saw their balances fall by 60% or more

Want to know more?

What are the details?

The chart above shows that people in the subprime credit score range saw the biggest score improvements among those who took out debt consolidation loans. However, many people with less-than-perfect or near-perfect credit scores saw improvement as well — and generally most people in the study with credit card debt benefited from a debt consolidation loan.

But it’s worth noting that a debt consolidation loan isn’t the only factor behind maintaining positive credit scores for the longer term. Rather, it’s a first step that works for some people as they pursue their financial goals. In fact, the data suggests that once borrowers take on a debt consolidation loan, they’re also more likely to apply for a new credit card, an auto loan or mortgage within the next year.

Also, keep in mind that the average borrower in the TransUnion study didn’t completely pay off their credit card debt with a debt consolidation loan — they just significantly reduced how much debt they had.

What can you do?

If you’re considering a debt consolidation loan, you’ll want to avoid taking on more debt than you can afford. Before you apply, focus on doing your research and understanding your credit and finances to find a loan that will work for you. For example …

  • Understand your credit scores: Learning what factors impact your credit scores can help you address issues that may be making your scores lower than you’d like. Building your credit to improve your credit scores can help you get better loan terms.
  • Keep a budget: Understanding your income versus debt by creating a budget to help map out how best to reach your financial goals and avoid overspending.

If you currently have a debt consolidation loan, overspending can be tempting with all the room you have on your credit cards again. But as the Consumer Financial Protection Bureau advises, a debt consolidation loan shouldn’t be followed by more large credit card purchases, or you could end up falling into much deeper debt.