Advertiser Disclosure

Banks.com » Loans » Debt Consolidation Loans » Does Debt Consolidation Hurt Your Credit?

Does Debt Consolidation Hurt Your Credit?

Written by Allison Martin

Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like Banks.com, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.

Updated May 22, 2023​

3 min. read​

does debt consolidation hurt your credit

Debt consolidation involves rolling multiple outstanding balances into a single debt product, preferably with a lower interest rate, to save on interest and get out of debt faster

If you’re overwhelmed by debt and the monthly payments are too much for your budget, you may be considering debt consolidation. Many consumers commonly use debt consolidation loans and balance transfer credit cards. You’ll generally need at least good or better credit for either approach to be worthwhile. Otherwise, you risk getting a higher interest rate than you already have and paying even more in interest, despite a lower monthly payment. 

Read on to learn more about the potential impacts that debt consolidation can have on your credit rating. 

Popular Debt Settlement Companies
Learn how Accredited Debt Relief can help you cut your monthly payments in half to pay off debts by enrolling in their debt relief program.

Accredited Debt Relief offers debt resolution services to financially distressed consumers who want to eliminate debt without filing for bankruptcy.

Learn how Freedom Debt Relief, the biggest debt negotiator in the US, can help you settle unsecured debts like credit cards.

Enroll in a custom program to help you become debt-free by negotiating and settling your unsecured debts like credit cards.

Consolidated Credit is a nonprofit with over 30 years of experience, offering credit counseling, housing counseling and financial resources.

Consolidated Credit is a nonprofit with nearly 30 years of industry experience offering credit counseling services.

Debt Consolidation: Positive Credit Impact

Improve Payment History 

Debt consolidation simplifies the repayment process as you’ll only pay one creditor instead of several each month. Furthermore, your payment history, which accounts for 35 percent of your FICO score, could improve over time. You won’t have to keep up with several due dates and risk missing payments, assuming you make timely payments on the new loan or credit card. 

On-time Payments

Perhaps you skipped a few debt payments before consolidating because you couldn’t afford them? With a more affordable lump-sum payment for all your balances each month, you’ll reduce the likelihood of falling behind again. 

Lower Credit Utilization Ratio

Your credit utilization, which is 30 percent of your score, refers to the amount of credit currently in use on your account. So, if the credit limit on your MasterCard is $1,000 and you have a $500 balance, your utilization rate is 50 percent. Ideally, you want this percentage to be at 30 percent or lower to give yourself the best chance at a healthy credit score. And by consolidating your credit card balances using a personal loan, you’ll easily improve your utilization and boost your score if you don’t use the cards once you pay them off. 

Improve Credit Mix

Creditors and lenders like to see a healthy combination of revolving and installment loans. Credit mix is also 10 percent of your FICO score. Adding a debt consolidation loan to your credit profile could help if you don’t currently have any installment loans. 

Popular Debt Settlement Companies
Learn how Accredited Debt Relief can help you cut your monthly payments in half to pay off debts by enrolling in their debt relief program.

Accredited Debt Relief offers debt resolution services to financially distressed consumers who want to eliminate debt without filing for bankruptcy.

Learn how Freedom Debt Relief, the biggest debt negotiator in the US, can help you settle unsecured debts like credit cards.

Enroll in a custom program to help you become debt-free by negotiating and settling your unsecured debts like credit cards.

Consolidated Credit is a nonprofit with over 30 years of experience, offering credit counseling, housing counseling and financial resources.

Consolidated Credit is a nonprofit with nearly 30 years of industry experience offering credit counseling services.

Debt Consolidation: Negative Credit Impact

New Credit Applications and Hard Inquiries on Your Credit

You’ll need to apply for a personal loan or balance transfer credit card to consolidate your debt. Unfortunately, a hard inquiry drops your score by two to five points each time you submit a credit application. Several inquiries in a short window could mean bad news for your credit score. 

The upside is many lenders and credit card issuers offer online pre-qualification tools that let you gauge your approval odds without impacting your credit score. They use what’s referred to as a soft inquiry to screen your credit profile, and you won’t have to undergo a hard inquiry unless you decide to submit a formal application.

A Decline in the Average Age of Your Accounts

Your length of credit history is 15 percent of your credit score. So each time you open a new credit account, whether it’s for debt consolidation or something else, it decreases the average age of your accounts. 

How To Minimize Impact on Your Credit

Consider A Debt Relief Solutions Expert 

Non-profit credit counseling agencies offer an alternative way to consolidate debt. It’s referred to as a debt management plan (DMP) and can help you reduce your monthly payments by 30 to 50 percent. You can also save up to 11 percent in interest and eliminate your unsecured debts in just 36 to 60 months without tanking your credit score.

Avoid More Debt 

It’s counterproductive to rack up more debt once you consolidate your current balances. Consequently, you want to refrain from using the credit cards once you pay them off with the consolidation loan or balance transfer credit card. Otherwise, you’ll end up with even more debt than you started with. 

Monitor Your Payment and Spending Habits 

You’ll also want to stick to a spending plan that incorporates your debt-payoff goals for debt consolidation to be effective and preserve your credit score. 

Monitor Your Credit  

Consider enrolling in a credit monitoring service to keep tabs on any activity that takes place in your credit profile. You’ll also be alerted to suspicious activity so that you can file disputes promptly. This service is available free of charge through Experian or other online platforms, like Credit Sesame, Credit Karma and Wallet Hub.

Debt Settlement

Advertisement Disclosure

Product name, logo, brands, and other trademarks featured or referred to within Banks.com are the property of their respective trademark holders. This site may be compensated through third party advertisers. The offers that may appear on Banks.com’s website are from companies from which Banks.com may receive compensation. This compensation may influence the selection, appearance, and order of appearance of the offers listed on the website. However, this compensation also facilitates the provision by Banks.com of certain services to you at no charge. The website does not include all financial services companies or all of their available product and service offerings.
×