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Will Debt Consolidation Hurt My Credit?

Last updated Mar 12, 2024

Looking for streamlined finances, simplified monthly bills, and a potential boost to your credit score? Debt consolidation is one way to accomplish all of the above, but it’s not a magic fix. There’s a lot to know about how debt consolidation works and how it can help or hurt your credit score. The more knowledge you have before taking out a debt consolidation loan, the better equipped you’ll be to manage your loan responsibly.

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What is debt consolidation?

Debt consolidation is the process of combining multiple debts and payments into a single debt with a single monthly payment. Consolidating your debt can help you simplify your monthly finances by reducing the number of bills you have to manage, like multiple credit card bills. It can also help you save money by lowering your interest rate, your monthly payment, or both. Debt consolidation can also help you make real progress on paying down debt. 

The two primary ways to consolidate debt are balance transfer cards and debt consolidation loans.

  • A balance transfer credit card allows you to transfer your debt to a low-rate balance transfer card. This can be a good strategy for saving on interest in the short term, but the rate typically rises after a short introductory period and may change on an ongoing basis. Plus, there is an added level of discipline needed to pay more than the minimum payment, otherwise, you’re still paying interest on your remaining balance. 
  • A debt consolidation loan is a personal loan you can use to pay off multiple debts that have multiple payments. Most debt consolidation loans have fixed rates and terms, so they can offer more predictable monthly payments and a clear payoff date.

Does debt consolidation hurt your credit?

Your credit score depends on a variety of factors that all work together and affect your score. Debt consolidation loans can impact many of those factors, potentially boosting your score in the process. Keep in mind that debt consolidation alone does not automatically improve your score. Your credit score depends on how you behave after you consolidate your debt. Will you stay on top of your monthly payments? Will you avoid running up balances? Will you open more new accounts?

The impact on your credit score also depends on which method you use to consolidate your debt. Let’s take a closer look at how debt consolidation loans can impact your credit score.

How a Debt Consolidation Loan May Help Your Credit Score

Debt consolidation can positively affect your credit score in a few ways. Keep in mind that for this to happen, you’ll need to stay on track and make monthly payments on time.

1. Credit Utilization Ratio

Your credit utilization ratio measures the portion of your total available credit you are using at a point in time. Using a personal loan to pay off existing credit card debt could improve your credit utilization ratio by increasing the amount of credit available to you. And if that debt consolidation loan means that you’ll pay the principal down faster than you would otherwise, it could continue to improve. This requires the discipline to avoid additional spending on your existing credit cards in a way that would run up your credit card balances. Additionally, once you’ve paid off existing credit card debt, make sure to keep those accounts open to continue improving your credit utilization ratio. Note that when you consolidate existing installment loans it may not increase the overall credit you have available, and therefore may not have the same impact on your credit utilization ratio or credit score.

2. Credit Mix

Credit mix refers to the different types of credit accounts you have—particularly how much revolving debt vs. installment debt you have. More variety in the types of credit you have can generally help your score. If you use a debt consolidation loan to replace some credit card debt, you’re adding an installment account to your credit profile, which could diversify your credit mix and potentially boost your score.

3. Payment History

The biggest factor impacting your credit score is your payment history—even one late payment can hurt your credit score. If the streamlined monthly payments that come with debt consolidation will help you pay on time, every time, then debt consolidation can boost your credit score by helping you avoid late payments.

How a debt consolidation loan may hurt your credit score

Like any credit product, debt consolidation can hurt your credit score in a few ways. The good news is these are mostly avoidable and not unique to debt consolidation.

1. Credit Inquiries

When you open a new account, such as a debt consolidation loan, the lender will typically perform a hard inquiry on your credit report. These are different from soft inquiries, which do not impact your credit score. A single hard inquiry will most likely not have a huge impact on your credit score, but it may cause a small dip for a few months. It’s always a good idea to shop around for the best rate, but make sure you know how to protect your score when applying for credit.

2. Average age of credit

Establishing a long credit history usually helps your credit score, provided you have a history of on-time payments on your open accounts. If you take out a new debt consolidation loan, it will cause your average age of credit accounts to decrease, which may cause a dip in your credit. However, you can mitigate this by keeping your oldest credit card accounts open (as long as you aren’t paying high fees or find that you’re racking up too much debt).

How to get the most out of your debt consolidation loan

To get the biggest benefit—both for your wallet and your credit score—from your debt consolidation loan, it’s important to stay on track. Use the loan as you intended and pay off your high-interest debt. There are a variety of techniques that may help you pay off debt quickly

Once you’ve consolidated your debt, resist the temptation to run up balances again. It’s a good idea to revisit your budget regularly to keep your spending in check. Even though your payments are streamlined, you still have to stay within your budget to be able to make your monthly payment. Check out more tips on how to stay on track with your debt consolidation loan.

Getting Started

Now that you know the ins and outs of how debt consolidation may impact your credit score and how to stay on track, it’s time to get started. As a first step, you can check your rate for a debt consolidation loan and see what you qualify for without impacting your score. Remember, if you stay on track with your monthly payments, a debt consolidation loan can improve your credit score.

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