Whether you’re preparing to make a large purchase or simply want a higher credit score, improving your credit can have many benefits. Consumers with a clean credit report and high credit score receive the best interest rates and terms when borrowing money. Plus, prospective employers and landlords may also review credit reports to look for potential red flags during their decision-making processes.

This leaves many people wondering what they can do to improve their credit. One way is through debt consolidation. If you’re not familiar with the process, let’s look at how to use debt consolidation to improve credit.

The Basics of Debt Consolidation

For consumers juggling multiple high-interest credit card payments each month, consolidating those debts into one convenient monthly payment is an appealing option. Having a single monthly payment makes it easier to budget and stay organized.

Debt consolidation can also help save money in interest, provided you’re able to qualify for a debt consolidation loan with a lower interest rate than the combined average interest rate of all your credit cards. Almost all banks, credit unions and online lenders offer debt consolidation loans specifically designed to help you pay off debt.

Once you receive the funds from your debt consolidation loan, you pay off all your outstanding credit card balances and are left with just a single loan payment each month. In some cases, the payment might even be less than what you’re currently paying on all your cards each month.

That sounds great! But how does it improve credit?

There are a few ways you can use debt consolidation to improve credit. By paying off all your outstanding balances (and keeping the accounts open), your total available credit will increase, which can help your credit score.

Plus, having just one payment lessens the chance for any late or missed payments. And finally, a debt consolidation loan adds an additional type of credit — an installment loan — into your credit mix. Although it’s a minor factor in the way credit scores are calculated, every little bit helps.

Are there downsides to debt consolidation?

Although you can use debt consolidation to improve credit, it can also have the opposite effect if you don’t use it carefully.

The idea of debt consolidation is to pay off high-interest debt and streamline the repayment process. For that to be successful, you need to not go back to charging on those cards once the accounts are paid off.

When calculating your potential savings, you’ll also want to consider  any loan origination fees, early payment penalties or other fees to ensure you’ll be saving as much as you hope to.

Is there a way to do debt consolidation without a loan?

Many people seeking the benefits of debt consolidation run into the reality of not having good enough credit to qualify for a loan at reasonable rates. Fortunately, a debt consolidation loan isn’t the only way to achieve these benefits.

Nonprofit credit counseling agencies offer debt management plans that feature many of the same benefits as a debt consolidation loan, but with no minimum credit score requirement, including:

• The convenience of a single monthly payment
• Lower interest rates
• Faster payoff time
• No contact with creditors

A credit counseling session is the first step to see if you qualify for a debt management plan. You can receive credit counseling on the phone with a certified credit counselor, or online any time by completing a self-directed financial review.