Debt consolidation combines multiple existing debts into one new debt to simplify payments and reduce interest rate payments. Credit repair focuses on correcting inaccuracies in credit reports. Read on to learn which may be right for you and how to get started.
Maybe you're juggling multiple credit card bills and aiming to improve your credit report, or maybe you're working to prepare for a life event like buying a home. Whatever the case, there's never a bad reason to cut down on how much interest you're paying each month, or to make sure that your credit score is as high as it can be. Knowing how debt consolidation loans and credit repair work and when to consider each can be what moves you forward.
In this guide, we’ll explore how each process works, its pros and cons, and practical steps you can take to set yourself up for financial success.
Key Takeaways
- Debt consolidation simplifies multiple debts into one and can lower overall repayment costs, but it may not be ideal for everyone. It can potentially cause a temporary credit score dip and lead to paying more depending on how long the loan repayment term is.
- Credit repair involves reviewing credit reports for inaccuracies and disputing any errors found, which can lead to a higher credit score. However, the process requires time and consistency, and it cannot remove accurate negative history from credit reports.
- A range of do-it-yourself tools and premium services are available for debt consolidation and credit repair, often offering budgeting and debt management strategies. However, consumers should be wary of debt relief and credit repair scams, and select any services -- especially ones that cost money -- very carefully.
- Don't confuse debt consolidation vs debt settlement or debt consolidation vs credit counseling. Debt consolidation often involves a personal loan to combine existing debts into one monthly payment, where a debt settlement company negotiates with your creditors on your behalf to reduce amounts owed, and credit counseling typically helps to create balanced budgeting and saving.
Understanding Debt Consolidation
Debt consolidation essentially involves taking out a new loan to pay off several outstanding debts. The key advantage of this strategy is realized when the interest rate or fees of the new loan are lower than those of the existing debts, which can lead to reduced monthly payments and a decrease in the overall amount you'll pay over the lifetime of the loan.
Another significant benefit of consolidating debt is the convenience and flexibility it offers. Combining multiple debt obligations into a single payment makes financial management simpler, allowing for a more straightforward approach to budgeting and financial planning. There's also typically few restrictions on the types of debt you can consolidate: unsecured debts like credit cards to medical bills are eligible.
How It Works
- Research debt consolidation lenders and identify the best one for you
- Apply to the lender
- Once approved, receive funding: the lender can either pay your creditors directly, or they can send you the money and you pay the creditors yourself
- Begin making one monthly payment on your new debt consolidation loan
Pros and Cons of Debt Consolidation
Pros of Debt Consolidation
- Consolidates multiple debts into one manageable monthly payment, simplifying budgeting
- Can lower interest paid over time if the consolidation loan's term and APR is lower than the combined APR of existing debts
- Potentially lowers the monthly payment amount if the consolidation loan's APR is less than the combined APR of the current debts
- Making timely payments on a consolidation loan can positively impact the borrower’s credit score and enhance their credit history
Cons of Debt Consolidation
- Must be cautious of total and added costs, such as origination fees or balance transfer fees
- Extending the repayment term of the debt consolidation loan beyond the terms of current debts could result in paying more interest over the life of the loan
- Creating more monthly disposable income after debt consolidation might lead to unnecessary increased spending
Understanding Credit Repair
Credit repair services exist to ensure your credit report is an accurate reflection of your financial history – making sure that everything the credit reporting agencies have recorded is clean and accurate. This process entails examining your credit reports and challenging any discrepancies or negative marks – such as late payments or defaults – to ensure errors aren't harming your credit rating.
It is important to note, however, that this process only works for inaccurate records: if there are negative marks on your credit report, but they are accurate, credit repair services won't be able to help. In these cases, the best step is to find ways to recover and boost your credit score as fast as possible, and credit building apps might be a better solution.
Credit repair can typically be done in one of two ways: either self-managed with a do-it-yourself tool, or by retaining the services of a reputable credit repair company.
How The Credit Repair Process Works
Whether you're pursuing credit repair on your own or purchasing a service through a firm, the credit repair process begins with securing your credit reports from the three major credit bureaus. With the reports in hand, the idea is to scrutinize every line, identify inaccuracies or unrecognized accounts, and aggressively dispute issues that could negatively impact progress toward a good credit score.
Once credit report issues are identified and you've gathered evidence to demonstrate the issues are errors, disputes with each bureau will be initiated, which is a formal process to challenge and rectify inaccuracies. From there, bureaus review each dispute and determine whether to keep your credit report as-is or remove the disputed issues.
Credit repair companies can assist for a fee, while individuals can handle disputes independently with a tool for less, or even no, cost. The benefits of using a credit repair company is usually time-savings: the process can require a lot of attention and follow-ups, which the companies do on your behalf. On the other hand, individuals can save money with a do-it-yourself tool (monthly costs are about half) if they are willing and able to dedicate some energy toward the process.
Regular reviews and disputing inaccurate information is a proven way to enhance your credit report, but remember, remediating issues is only one way to improve your score. Limiting new credit applications, keeping older accounts open, managing credit utilization, and staying up-to-date with payment history are also foundational and can have a real impact on your credit score – even if you can't get inaccuracies removed.
Pros and Cons of Credit Repair
Pros of Credit Repair
- Credit repair and formal dispute processes can improve your score by removing harmful inaccuracies
- Reviews ensure your report is fair and accurate and can identify issues early on
- Credit repair specialists may realize benefits faster than pursuing it on your own
- Better credit scores can lead to better approval odds and lower APRs
Cons of Credit Repair
- Typically only works for inaccurate, false information -- accurate negative information is very unlikely to get removed
- The process is often months long, don't expect overnight progress
- No guarantee of improvement
- Wide range of costs from do-it-yourself tools to retained firms means that doing research and comparison-shopping is key
- Be wary of scammers posing as legitimate credit repair firms
When To Choose Debt Consolidation Vs. Credit Repair
Debt consolidation combines multiple debts to simplify payments and potentially reduce interest rates; credit repair works to correct inaccuracies in credit reports. The former is most beneficial for those with multiple debts with varying interest rates, while the latter is tailored for those whose credit scores may be suffering from inaccurate negative marks on their credit reports.
When to Choose Debt Consolidation
Debt consolidation is best for people who have a solid credit score and desire to manage multiple debt payments more efficiently, lower interest rates, or extend repayment to create more cash flow. It’s most fitting when you’ve seen an uptick in your credit score or income since taking on high-interest loans and now seek more comfortable repayment terms.
Consider opting for debt consolidation when:
- You're solving for a substantial amount of debt
- You can get a better interest rate than you currently have
- Your cash flow adequately supports the new payment
If you can't make your payments, debt consolidation may not be the right approach for you. Instead, it may be worth taking more significant action to reduce the amounts you owe through a debt relief company or debt settlement vs. debt consolidation. Credit counseling organizations can be a good place to start if you have questions about how to negotiate with your creditors, and what the impacts of this approach could be on your credit report and finances. A credit counselor can review your options and provide you with personalized debt management plans, typically for little or no cost, as many of these firms are non-profits.
When to Choose Credit Repair
Credit repair services aim to enhance credit scores by correcting errors on credit reports. Whether it's through a DIY app or through a professional credit repair services firm, the process is largely the same: your credit history is carefully reviewed, inaccuracies are disputed with the credit bureaus, and inaccurate negative marks are removed. This process can positively affect credit scores by rectifying issues like incorrect late payments or fraudulent accounts. While it cannot delete accurate negative information, having an accurate credit report puts your best financial foot forward, potentially leading to better credit opportunities.
Credit repair works best when inaccuracies on your credit reports harm your credit score. These inaccuracies may include fraudulent accounts, incorrect balances, or payment history. If your credit score is lower, credit repair can be a helpful process to rectify the situation.
Finding Debt Consolidation Loans
There are a number of ways to access quality debt consolidation loans. Balance transfer credit cards, personal loans, home equity loans, and HELOCs can all help combine your debts, including credit card debt, into a single, more manageable repayment term with a lower, fixed interest rate. However, our focus here is on personal loans that can be used to consolidate debt. Based on our research and customer reviews, some of the top debt consolidation lenders to consider include:
AmOne
- AmOne's marketplace model enhances approval odds by presenting your application to multiple personal loan lenders at once
- Instant offers of up to $50,000 with funding as fast as 24 hours
- Offers available for a range of credit ratings
Upstart
- Loans range from $1,000 to $50,000 with competitive rates
- No minimum credit score requirements
- Fast approval and funding times: approvals are typically instant, and funding in one business day
Best Egg
- Loans ranging from $2,000 to $50,000
- Provides both secured and unsecured loan options
- No late fees or prepayment penalties
Finding a Reputable Credit Repair Service or DIY Tool
Professional Credit Repair Services
When selecting a credit repair service, aim for those that have clear qualifications and accreditations, as well as a strong track record of positive customer reviews. Make sure that the fees and promises a company makes sounds legitimate: if they are offering cut-rate prices, require large payments upfront, or are making guarantees about how quickly or how completely they can improve your credit report, it is probably too good to be true. Unfortunately there are a lot of scammers posing as legitimate credit repair services, so doing due diligence before working with a company is key. To help in the process, we have identified some of the top legitimate credit repair services for you to review as part of your research:
Lexington Law
- Licensed attorneys and paralegals assist with correcting your credit profile
- Personalize score improvement plans
- No cost to start, then $99.95/mo
Credit Saint
- Free consultation to assess unfair or inaccurate negative items
- 4.8/5 stars on Google and rated A by the Better Business Bureau
- Plans start at $99.00 setup cost and $110 per month with a 90-day Money-Back Guarantee
DIY Credit Repair Tools
When selecting a DIY credit repair tool, such as an app, make sure that you fully understand how much it will cost and how the fees are structured. Also take time to review how the process works, and look at customer reviews to make sure others have already had success using it. This will help ensure the tool you are considering is the right one for you.
Below, we list the top credit repair apps with proven track records of helping their customers remove inaccuracies and improve their credit reports:
Dovly
- AI-powered error identification prioritizes most effective route to boost your score
- Average credit improvement of 79 points with Premium plan
- Credit report monitoring included in monthly subscription
- Free basic plan (only 1 dispute per month) and $39.99/mo for unlimited disputes
Credit Versio
- Unlimited disputes means you can send disputes to all 3 bureaus simultaneously
- Physical letters are sent to the the credit bureaus – increasing chances of getting negative marks deleted
- $24.95 to $30 per month as part of a SmartCredit subscription
The Bottom Line
Both credit repair and debt consolidation have their unique strengths and benefits: it really depends on your personal situation whether one or the other (or both) could be of use to you. Ultimately, credit repair is for those who may have inaccurate marks negatively and unfairly dragging down their credit scores. On the other hand, debt consolidation is for people who are looking to combine multiple debt payments into one payment with a lower interest rate.
With this in mind, knowing some of the top lenders, services, and tools reviewed in this article is the first step to finding the right partner for you in achieving the financial health you're after.
Frequently Asked Questions
What is the difference between credit repair and credit consolidation?
The main difference between credit repair and credit consolidation is that credit consolidation helps to combine debts with a lower interest rate for savings, while credit repair focuses on improving credit reports and ensuring accuracy. Credit consolidation aims to simplify payments and save money, while credit repair targets cleaning up credit reports.
How long does it take to rebuild credit after debt consolidation?
It typically takes between 6-24 months for your credit score to improve after debt consolidation, although some individuals have seen improvements in as little as three months.
What exactly is debt consolidation, and how does it work?
Debt consolidation is the process of combining multiple debts into one account with a lower interest rate, simplifying monthly payments and potentially reducing the total amount paid over time. This can help to streamline your finances and save money in the long run.
Is credit repair worth it, and can it remove all negative items from my report?
Credit repair can be beneficial if there are inaccuracies on your credit report. It can help correct errors, but it cannot remove accurate negative items. Therefore, it's worth considering if you believe there are inaccuracies on your report.
How can I avoid scams?
To avoid scams, be cautious of services that guarantee immediate results and request upfront payment. It's essential to thoroughly research the company, read reviews, and seek guidance from the state attorney general to verify their legitimacy.
