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Does Debt Consolidation Hurt Credit Score

Pros And Cons Of Consolidating Your Debts

How Does Debt Consolidation Affect Your Credit Score?

Outside of the impact on your credit score, there are other pros and cons associated with consolidating your debt.

On the pro side, having just one payment to make each month on the new loan is much easier than having to make several. Its easier to plan and budget for. One payment also means that youll only be paying one interest rate, and wont have to worry as much about fees for late payments. These factors alone could save you hundreds of dollars by the time your loan is paid off.

On the con side, particularly in the short term, debt consolidation can have a massive negative effect on your credit score. Yes, if youre diligent you can help that score rebound and even rise. Can you afford to take that hit right now, though?

Consolidate With A Balance Transfer Credit Card

Credit card companies looking for new customers sometimes offer an introductory period when you can transfer balances and get a 0% interest rate. That rate can last a few months, a year, or longer. If you feel you can comfortably pay off your outstanding balances in that time, this could be a good option for you. Search for balance transfer credit cards online.


  • A good or excellent credit score can land a lower interest rate plus 0% APR introductory period.
  • Consistent payments can boost your credit score.
  • Qualifying for a higher credit limit lowers your credit utilization ratio, improving your credit score.


  • A hard inquiry will temporarily impact your score
  • Not repaying before the intro period ends means higher interest rates and payments. This can lead to missed payments, affecting your score.
  • May increase your credit utilization, hurting your score.

Why Consolidate Your Debts

Consolidating your debt can save you money. If you have credit card debt that charges 20% or more in interest, consolidating into a new credit card or loan with a lower interest rate will save you money. Do the math for your specific debt to make sure youll save more than any fees youll pay for balance transfers.

It may also simplify your payments. When you have many accounts to manage, you are more likely to make a mistake and miss a payment. Missed and late payments can hurt your credit scores, so consolidating everything into one monthly payment might help protect your credit from a payment mishap.

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Can Debt Consolidation Help My Credit Score

While debt consolidation is mainly a method of lowering or eliminating mounting debt, it can also have a positive effect on your credit score. Beyond helping you reduce your number of monthly debt payments and save on interest over the life of your loans, debt consolidation can help you eliminate or drastically reduce your total debt over time.

When you consolidate revolving debtlike credit card accountsyou also will be working toward reducing your utilization ratioone of the most important factors in calculating your credit score. Your is calculated by comparing how much available credit you have and how much you use each month. Credit utilization accounts for 30% of your credit score.

Imagine if you have one credit card with a limit of $10,000. If the balance on that card is $5,000, your credit utilization ratio is 50%. It is commonly recommended to keep your credit utilization under 30%. As you roll revolving credit debt into a debt consolidation loan, and if you keep your balances on those accounts low, this can help to reduce your credit utilization and in time help boost your credit score.

You Have To Open A New Credit Account

Does Debt Consolidation Hurt Your Credit Score?

Anytime you open a new credit account, it can lower your credit score since theres still that “unknown” factor of whether you will responsibly pay it off. Plus, any new credit will also increase your debt-to-income ratio, which may make it harder to get approved for credit during the life of your loan or credit account.

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Why Is Debt Consolidation A Bad Idea

The main downside to debt consolidation when you compare it to other debt-relief options is that it doesnt reduce the total amount that you owe, it simply restructures how your debt is set up. It does provide simplicity as you only have one payment to make, but an option like debt settlement will help you reduce the amount you owe. Debt consolidation loans can also be harder to qualify for.

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When Should I Think About Consolidating My Debt

If you have a thousand dollars on two credit cards, and are paying off your balances each month, debt consolidation probably isn’t worth it, Nitzche said.You should be carrying at least $5,000 in unsecured debt before considering it, according to Rossman.

To choose the right strategy, tally up your credit card balances and loans, factoring in the interest rates, minimum monthly payments and outstanding balances.

And be sure to compare interest rates, terms of the contract, penalties and other information from multiple lenders.

Other Ways To Consolidate Debt

Debt settlement-Does it hurt your credit score?

There are, of course, other ways to consolidate debt. For example, homeowners have the option of a home equity loan or home equity line of credit might be an option. If youve been paying off your mortgage for several years and have some equity built up, this might be a good time to consider a mortgage refinance. Another option could be to take a loan out from your 401 or IRA. Be careful here, though! The penalties for defaulting on these types of loans are steep.

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Lender May Perform A Hard Inquiry

When you consolidate your debts, you essentially take on a new loan, which triggers a hard credit check on your credit report. Every hard inquiry may lower your credit by up to 10 points. The good news is that the impact lasts for a maximum of one year, and many people with good credit or excellent credit have hard credit inquiries on their credit report.

How To Consolidate Debt Without Hurting Your Credit

Some lenders will pay your credit cards off for you when they approve you for a debt consolidation loan. If not, your best choice is to pay them yourself immediately. Get the money out of your hands before you spend it on something it wasnt intended for. In some cases, there will be a few dollars left over when youre done. Spend that if you like.

The next step, if you want to avoid hurting your credit score, is to put your credit cards away. Dont cut them up because you may need the security codes on the back to contest fraudulent purchases or identity theft. Hide the cards in a drawer and make a commitment not to use them until the loan is paid off. As the loan balance comes down, your credit score will go up.

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When Does It Make Sense To Consolidate Your Debts

The most common and best reason to consolidate debts is to get lower interest rates and reduce your monthly payment. It, therefore, makes sense to do debt consolidation when market rates are lower than the rate you are currently locked in. You could potentially save hundreds or even thousands by lowering your interest rate and monthly payment.

Besides that, it also makes sense to consolidate your debts if you have too many credit accounts. Juggling multiple loans and credit cards can be quite tricky, and you may find it hard to keep up with all the due dates. To simplify everything, you can consolidate the debts so that you only remain with one new debt to focus on. You may also have other types of debt such as student loans, installment loans, auto loans, or home loans.

Debt Consolidation And Your Credit

Does Debt Consolidation Hurt Your Credit Score?

We have all been told to make our payments on time. If I do this then I should have great creditright? Well the truth is that making your payments on time every month only affects about 35% of how your score is determined.

The simple answer is that a Debt Consolidation Loan should improve your credit and not hurt it. The reason for this is called credit utilization and dont let the term confuse you. All this means is the amount of your available credit that you are using at any time.

Quick example: You have a $25,000 line of credit through your bank and you have borrowed $24,500 of it for the last 12 months that have reported to your credit bureau. This is a 98% use of your available credit.

Read more about all the things you need to know about Debt Consolidation Loans.

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Monitor Your Credit Closely After You Consolidate

Whether you use a loan, a balance transfer card, or a debt management plan to consolidate, its always a good idea to keep an eye on your . You want to make sure that the balances on your individual accounts reflect that they have been paid down. You also want to watch out for misreported missed payments.

If you find any errors in your credit report following consolidation, you should go through the credit repair process. This will allow you to correct the negative items that may be dragging down your score.

How Much Does Debt Consolidation Hurt Your Credit Score

Most debt consolidation methods will temporarily lower your credit score for a variety of reasons. For example, debt management plans ask you to quit using your credit cards. If you cancel a card, that reduces the amount of credit you have available and that can lower your credit score.

When you apply for a consolidation loan, lenders make a hard inquiry on your credit, which lowers your score by a few points. If youre shopping for the best option and there are several inquiries within a limited period, generally 14-45 days, the credit bureaus treat it as one inquiry. Inquiries spread over more time, however, will be seen as desperate attempts for credit and have more of a negative impact.

Other impacts of debt consolidation depend on the method. Loans and balance transfers have many potential negative effects, debt management plans very little.

No matter which method you choose, the biggest factor on how debt consolidation impacts your credit is how you treat the credit you have. Late payments on loans, credit cards and other bills hurt your credit score. A payment thats 30 days late stays on your credit report for seven years.

Making payments on time is the absolute best thing you can do to maintain good credit or repair poor credit.

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Lower Credit Utilization Ratio

Another way debt consolidation can help your credit score is by reducing your credit utilization, says Harzog. Once you consolidate to a personal loan, the percentage of your credit card balances being used is lower.

Even completing a balance transfer can improve your credit utilization ratio, says Harzog, because the new credit and new debt is taken into consideration and youve paid down your other credit cards.

What Is Debt Consolidation

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When you consolidate debt, you take out a new loan to pay down high-interest debt. In doing so, you are rolling all your payments into one monthly bill, ideally with a fixed interest rate. There are several ways to consolidate. The most common methods are personal loans and balance transfer credit cards.

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When Does Debt Consolidation Improve Your Credit Score

There are also a few ways in which debt consolidation can help boost your credit score:

  • Lower credit utilization: Transferring a balance to a card with a higher credit limit could decrease your credit utilization and boost your score. For example, if you have a $3,000 balance on a card with a $4,000 limit, you are utilizing 75% of the available credit. If you transfer that $3,000 balance to a card with a $10,000 limit, now youre only utilizing 30% of the available credit.

  • On-time payments: Making regular, on-time debt payments is one of the most important factors that go into building a positive credit history. If you stay on top of your debt payments, that can boost your score.

Debt consolidation can potentially help improve your overall financial situation, which should make it easier for you to successfully manage your debt payments. Over time, this can significantly improve your credit and your overall finances.

The Debt Avalanche Method

The debt avalanche method is an approach to paying off debt that, if done properly, can accelerate your debt payoff and save you money along the way.

This strategy has you make just the minimum payment on all of your debts except for the one with the highest interest rate, to which youll put as much as you can. Once that debt is paid off, take all the payments you were making toward it and apply them to the account with the next-highest interest rate until its paid off.

Repeat this process until all of your debts are paid in full. Because it targets your high-interest debts first, the debt avalanche method can save you more on interest charges than other payoff methods.

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Does Consolidating Debt Help Your Credit Score

Its possible to have good credit and a lot of debt, says Harzog. Especially if youre making your payments on time and havent quite maxed out your credit cards.

If youre in that position, you have a better chance of being approved for one of the best debt consolidation loans or a credit card balance transfer with a low interest rate. Youre not likely to hurt your credit score too much, and in the long run, tackling the debt will help. Heres how:

Negative Affects On Credit

Does Debt Consolidation Hurt Your Credit Score?
  • A new account has no payment history, until on-time payments are consistently made.
  • The average age of credit accounts drops with a new account the older the average, the better.
  • If debt is transferred to a card with a lower credit limit, credit utilization rate will increase and that will lower your credit score.

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Set Up An Emergency Savings Fund

Whichever strategy you pick to consolidate your debt, Roberge recommends separately building up an emergency fund, or a cash reserve that you can use in the future to avoid falling back into credit card debt.

“You’ll want to build up cash in a savings account that you absolutely do not touch unless it’s a true emergency,” he says. No dipping into it to take a vacation or cover a big shopping spree.

Generally, experts recommend that you save three to six months’ worth of expenses in your emergency account. But Roberge admits that’s a lot of cash to save up, especially when you’re just starting out. Instead, set a smaller goal of having $1,000 set aside for emergencies and work up from there.

To make the most of this money, open a high-yield savings account where you can earn at least a small amount on the cash that will be sitting there.

Can You Get A Better Interest Rate With Debt Consolidation

It is possible to get a better interest rate with debt consolidation, but it depends on your credit score. A better interest rate can help you pay less in the long run, but it doesnt do anything to reduce the initial amount you owe. If you feel like you have too much debt to pay back, another debt relief option such as debt settlement might be a better option for you. Check out this calculator to see how much you could save with debt settlement vs. debt consolidation.

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How Can Creditassociates Help

At CreditAssociates we can help you get out of debt by negotiating with your creditors to help you become debt-free for less than what you owe. Our certified debt specialists can help get you started on the path to financial freedom with a FREE consultation. We want to help you find the right debt relief solution and we have the system in place to help you on this journey. Check out our free debt calculator to see how much we could help you save.

Is Debt Consolidation Right For You

How Debt Consolidation Affects Credit

Debt consolidation can be very helpful for some borrowers, but itâs not right for everyone. If you have healthy financial habits, are able to pay your bills on time, and have a good enough credit score to get a personal loan with a lower interest rate, you may be a good candidate. If you have poor credit but you can make a single monthly payment consistently, consolidating your debt through a debt management plan is probably your best bet.

Also, if youâre having trouble keeping track of your monthly payments and due dates or you have a lot of high-interest debt, consolidating your debts can provide many benefits. If you qualify for a lower interest rate, youâll save money in the long run, and more of your monthly payment will go toward the principal rather than paying the interest.

Youâll also only have a single monthly payment to worry about, which makes it easier to make on-time payments and avoid missed payments. In addition to making your life easier, this arrangement can also help boost your . Plus, your monthly payment may be less than what you were paying before, which means youâll be saving money every month, too.

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