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Loans

How a debt consolidation loan can help you improve your credit score

Credit card debt is expensive and can hurt your credit score. Here's a payoff option to consider when chipping away at your debt is taking too long.

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Uwe Krejci | DigitalVision | Getty Images
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

Credit card debt can hurt your credit score — even if you're dutiful about making on-time minimum payments every month. And if you have outstanding debt on more than one credit card, it may seem like there's no end in sight.

If you feel like you'll never be able to pay off your high-interest credit cards, a debt consolidation loan may help you get on track with a more straightforward and affordable payoff plan. And you get the added bonus of improving your credit score, too.

Ahead, Select explains why lowering your credit card balances with a debt consolidation loan can have a positive impact on your credit while also helping you take steps toward financial freedom.

How your credit card balance impacts your credit score

Your credit utilization rate (CUR) is the second biggest factor (after payment history) that makes up your credit score. FICO and VantageScore, the two most common credit scoring models, look at the size of your credit card balances in comparison to how much available credit you have left.

Both major scoring models rank "amounts owed" and/or "percent of credit limit used" just below the number-one most important factor, on-time payment history.

Experts recommend keeping your total CUR well below 30% — so if you have a $10,000 credit limit, you should aim not to spend more than $3,000 each billing cycle. Some experts even suggest staying below 10%, which might not always be realistic depending on your budget and how much credit you have available.

What to do if your debt is ruining your credit score

If your high credit card balance is impacting your score, you'll want to take steps to pay it off as soon as possible.

The fastest option is to make higher-than-minimum payments until you've completely paid off your full balance. You'll continue to pay interest, but depending on how much you can afford to pay each month, you could tackle it before the interest charges get too out of control. But not everyone can afford to go this route.

If the balance is so high that you can't make a considerable dent, and you're spending a lot of money on high interest charges, you might want to consider transferring that debt to a personal loan with a lower APR. While applying for a debt consolidation loan will result in a small ding to your credit score (as with every hard inquiry), drastically lowering your CUR will more than likely result in a noticeable boost to your credit score.

After applying and getting approved for a debt consolidation loan, many lenders will pay off your creditors directly. Then you repay the loan in monthly installments, usually with a lower, fixed interest rate than you were paying on your credit cards. Once a personal loan is paid off, the credit line is closed and you have no more access to it. 

Before you make any decisions, use a free credit score simulator such as the one provided by CreditWise® from Capital One® to see that happens if you were to take out a new loan and pay off your credit card balance.

Using this free tool, you can enter hypothetical scenarios, such as taking out a $10,000 loan and/or paying off $10,000 of your current credit card debt, then watch as your score recalculates to estimate how it may improve with every financial decision. (You can also see what could happen in other hypothetical situations, like applying for a mortgage, taking out a car loan, letting your payments default, etc.)

Every consumer's credit score depends on multiple variables. There are no guarantees, but you may find that reducing your CUR will help you raise your credit score in under 30 days.

Select offers a widget where you can put in your personal information and get matched with personal loan offers without damaging your credit score.

When narrowing down and ranking the best debt consolidation loans, we focused on recommending loans with fixed-rate APR (meaning it doesn't go up and down), flexible loan amounts and terms, no early payoff penalties and no origination fees when possible. (Read more about our methodology below.)

Top personal loans for debt consolidation

Best for paying creditors directly

Marcus by Goldman Sachs Personal Loans

On the Marcus by Goldman Sachs secure site
  • Annual Percentage Rate (APR)

    6.99% to 19.99% APR when you sign up for autopay

  • Loan purpose

    Debt consolidation, home improvement, wedding, moving and relocation or vacation

  • Loan amounts

    $3,500 to $40,000

  • Terms

    36 to 72 months

  • Credit needed

    Good

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    None

See our methodology, terms apply.

Pros

  • No origination fees, no early payoff fees, no late fees
  • Will send direct payment to up to 10 creditors (for debt consolidation)
  • Monthly VantageScore updates
  • Earn a one-month payment vacation (interest-free) after making 12 on-time consecutive payments
  • Ability to choose your due date when you accept the loan (and again up to two more times after that)

Cons

  • Does not accept joint applications and/or co-signers
  • Not the fastest funding (can take a week or 10 business days)
  • Slightly tougher approval requirements (especially for larger loans/lower interest)

Best for student loan consolidation

SoFi Personal Loans

On Sofi's secure site
  • Annual Percentage Rate (APR)

    5.99% to 18.85% when you sign up for autopay

  • Loan purpose

    Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses

  • Loan amounts

    $5,000 to $100,000

  • Terms

    24 to 84 months

  • Credit needed

    Good to excellent

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    None

See our methodology, terms apply.

Pros

  • No origination fees, no early payoff fees, no late fees
  • Unemployment protection if you lose your job
  • DACA recipients can apply with a creditworthy co-borrower who is a U.S. citizen/permanent resident by calling 877-936-2269
  • Can have more than one SoFi loan at a time (state-permitting) 
  • May accept offer of employment (to start within the next 90 days) as proof of income
  • Co-applicants may apply

Cons

  • Applicants who are U.S. visa holders must have more than two years remaining on visa to be eligible
  • No co-signers allowed (co-applicants only)

Best for fair/average credit

Upstart Personal Loans

On Upstart's secure site
  • Annual Percentage Rate (APR)

    6.95% to 35.99%

  • Loan purpose

    Debt consolidation, credit card refinancing, home improvement, wedding, moving or medical

  • Loan amounts

    $1,000 to $50,000

  • Terms

    36 and 60 months

  • Credit needed

    FICO or Vantage score of 600 (but will accept applicants whose credit history is so insufficient they don't have a credit score)

  • Origination fee

    0% to 8% of the target amount

  • Early payoff penalty

    None

  • Late fee

    The greater of 5% of monthly past due amount or $15

See our methodology, terms apply.

Pros

  • Open to borrowers with fair credit (minimum 600 score)
  • Will accept applicants who have insufficient credit history and don't have a credit score
  • No early payoff fees
  • 99% of personal loan funds are sent the next business day after completing required paperwork before 5 p.m. Monday through Friday

Cons

  • High late fees
  • Origination fee of 0% to 8% of the target amount (automatically withheld from the loan before it's delivered to you)
  • $10 fee to request paper copies of loan agreement (no fee for eSigned virtual copies)
  • Must have a social security number

Best for consolidating debt while improving financial literacy

Upgrade Personal Loans

On Upgrade's secure site
  • Annual Percentage Rate (APR)

    5.94% to 35.97%

  • Loan purpose

    Debt consolidation/refinancing, home improvement, major purchase

  • Loan amounts

    $1,000 to $50,000

  • Terms

     24 to 84* months

  • Credit needed

    Fair, good to excellent

  • Origination fee

    2.9% to 8%, deducted from loan proceeds

  • Early payoff penalty

    None

  • Late fee

    Up to $10 (with 15-day grace period)

See our methodology, terms apply.

Pros

  • No early payoff fees
  • Loans up to $50,000
  • Fixed interest rates (no surprises)
  • Can pay creditors directly (may take up to two weeks)
  • Fast funding in as little as four days

Cons

  • No joint applications or co-signers
  • Origination fee of up to 8% (deducted from your loan)
  • Not available in Colorado, Connecticut, Iowa, Maryland, Vermont and West Virginia

Why Upgrade is the best for financial literacy:

  • Free credit score simulator to help you visualize how different scenarios and actions may impact your credit
  • Charts that track your trends and credit health over time, helping you understand how certain financial choices affect your credit score
  • Ability to sign up for free credit monitoring and weekly VantageScore updates

Best for staying motivated

Payoff Personal Loans

On Payoff's secure site
  • Annual Percentage Rate (APR)

    5.99 to 24.99%

  • Loan purpose

    Debt consolidation/refinancing

  • Loan amounts

    $5,000 to $40,000

  • Terms

    24 to 60 months

  • Credit needed

    Fair/average, good

  • Origination fee

    0% to 5% (based on credit score and application)

  • Early payoff penalty

    None

  • Late fee

    5% of monthly payment amount or $15, whichever is greater (with 15-day grace period)

See our methodology, terms apply.

Pros

  • Peer-to-peer lending platform makes it easy to check multiple offers
  • Loan approval comes with Payoff membership and customer support
  • No early payoff fees
  • No late fees
  • Fast and easy application
  • U.S.-based customer service

Cons

  • Higher loan minimums ($5,000)
  • Must submit soft inquiry to see origination fees and other details

How Payoff is designed to help you stay motivated:

  • Offers borrowers a dedicated "Empowerment Science" team that is available to take questions and provide encouragement
  • Free personality tests, stress assessments and cash flow trackers to help borrowers understand their money management style and nail down better habits
  • Free FICO tools help members track their progress*

*Based on a study of Payoff Members between February 2020 to August 2020, members who use a Payoff Loan to eliminate at least $5,000 of credit card balances reportedly see an average FICO Score boost of 40 points. (Results may vary and are not guaranteed.)

Best for good to excellent credit

LightStream Personal Loans

On LightStream's secure site
  • Annual Percentage Rate (APR)

    2.49% to 19.99%* when you sign up for autopay

  • Loan purpose

    Debt consolidation, home improvement, auto financing, medical expenses, wedding and others

  • Loan amounts

    $5,000 to $100,000

  • Terms

    24 to 144 months*

  • Credit needed

    Good

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    None

See our methodology, terms apply.

Pros

  • Same-day funding available through ACH or wire transfer
  • Loan amounts up to $100,000
  • No origination fees, no early payoff fees, no late fees
  • LightStream plants a tree for every loan

Cons

  • Requires several years of credit history
  • No option to pay your creditors directly
  • Not available for student loans or business loans
  • No option for pre-approval on website (but pre-qualification is available on some third-party lending platforms)

Best for joint applicants

Prosper Personal Loans

On Prosper's secure site
  • Annual Percentage Rate (APR)

    7.95% to 35.99%

  • Loan purpose

    Debt consolidation/refinancing, home improvement, auto/motor, medical or dental, big purchase and more

  • Loan amounts

    $2,000 to $40,000

  • Terms

    36 and 60 months

  • Credit needed

    Good

  • Origination fee

     2.41% to 5%, deducted from loan proceeds

  • Early payoff penalty

    None

  • Late fee

    5% of monthly payment amount or $15, whichever is greater (with 15-day grace period)

See our methodology, terms apply.

Pros

  • Co-borrowers are permitted
  • Repeat borrowers may qualify for APR discounts
  • Option to change your payment date according to when works best for you
  • Wide range of loan amounts
  • No prepayment penalty

Cons

  • High late fees
  • Origination fee of 2.41% to 5.99%, deducted from loan proceeds
  • Only two loan terms to choose from (3 or 5 years)

Our methodology

To determine which personal loans are the best for consolidating debt, Select analyzed dozens of U.S. personal loans offered by both online and brick-and-mortar banks, including large credit unions. When possible we chose loans with no origination or sign-up fees, but we also included options for borrowers with lower credit scores on this list. Some of those options have origination fees.

When narrowing down and ranking the best personal loans, we focused on the following features:

  • Fixed-rate APR: Variable rates can go up and down over the lifetime of your loan. With a fixed rate APR, you lock in an interest rate for the duration of the loan's term, which means your monthly payment won't vary, making your budget easier to plan.
  • Flexible minimum and maximum loan amounts/terms: Each lender provides more than one financing option that you can customize based on your monthly budget and how long you need to pay back your loan.
  • No early payoff penalties: The lenders on our list do not charge borrowers for paying off loans early.
  • Streamlined application process: We considered whether lenders offered same-day approval decisions and a fast online application process. 
  • Customer support: Every loan on our list provides customer service available via telephone, email or secure online messaging. We also opted for lenders with an online resource hub or advice center to help you educate yourself about the personal loan process and your finances.
  • Fund disbursement: The loans on our list deliver funds promptly through either electronic wire transfer to your checking account or in the form of a paper check. Some lenders (which we noted) offer the ability to pay your creditors directly.
  • Autopay discounts: We noted the lenders that reward you for enrolling in autopay by lowering your APR by 0.25% to 0.5%.
  • Creditor payment limits and loan sizes: The above lenders provide loans in an array of sizes, from $1,000 to $100,000. Each lender advertises its respective payment limits and loan sizes, and completing a preapproval process can give you an idea of what your interest rate and monthly payment would be for such an amount.

Note that the rates and fee structures advertised for personal loans are subject to fluctuate in accordance with the Fed rate. However, once you accept your loan agreement, a fixed-rate APR will guarantee your interest rate and monthly payment will remain consistent throughout the entire term of the loan. Your APR, monthly payment and loan amount depend on your credit history and creditworthiness. To take out a loan, lenders will conduct a hard credit inquiry and request a full application, which could require proof of income, identity verification, proof of address and more.

*Your LightStream loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Excellent credit is required to qualify for lowest rates. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $10,000 loan at 3.99% APR with a term of three years would result in 36 monthly payments of $295.20.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.