Does Debt Consolidation Hurt Your Credit?
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If you've ever found yourself juggling multiple credit card bills, personal loans, or other forms of debt, you know how helpless you can feel. The constant pressure of due dates, minimum payments, and high interest rates can make it difficult to see a path forward or a shining light at the end of the tunnel. Debt consolidation promises a way out—a chance to streamline your payments, reduce stress, reduce wrinkles and gray hairs, and maybe even save a few pennies along the way.
In this article
What is debt consolidation?
Debt consolidation is a financial strategy used to combine multiple outstanding debts, such as credit cards, personal loans, or other types of unsecured debt, into a single, more manageable monthly payment. In the majority of cases, debt consolidation loans come with a lower interest rate compared to credit cards, which can save you money over time. For many, the appeal lies in simplifying their finances—going from multiple debt payments and due dates to just one.
That being said, debt consolidation is not a one-size-fits-all solution, and it can have varying effects on your credit score. If you're worried about how it will impact your credit, you're not alone. The answer isn’t straightforward—debt consolidation can both positively and negatively affect your credit, depending on how you manage the process.
Millions struggle with debt. We help them move on with their lives.
- End your debt stress with a proven, affordable debt relief program. Our consultants will guide you through every step.
- Everyone’s financial situation is different. That’s why we start by giving you a free debt analysis and create a custom solution based on your unique needs and goals.
- Let us help you solve your debt problems and move forward with improving your overall financial health.
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Does debt consolidation affect your credit score?
Debt consolidation can impact your credit in several ways, both short-term and long-term. Initially, applying for a debt consolidation loan often results in what’s called a “hard inquiry” on your credit report, which may cause a slight dip in your score. It’s important to note that opening a new credit account could temporarily lower your average account age, which is another factor that may negatively affect your credit score.
On the positive side, consolidating your debt can improve your credit utilization rate. Credit utilization—the percentage of your available credit you're using—is a significant factor in your credit score. When you pay off credit card balances with a consolidation loan, your utilization rate drops, which can boost your credit score over time. If you have good credit or excellent credit, you are more likely to qualify for lower interest rates on a debt consolidation loan. Debt consolidation loans for poor credit are also available, though they often come with higher interest rates that can turn out to be quite cumbersome if not managed properly.
The short-term pain: Credit inquiries and age of the account
During the application process for a debt consolidation loan, lenders will perform a credit check to assess your creditworthiness. Hard inquiries can lower your credit score slightly, usually by 5-10 points. This drop is often temporary, but it may still have a minor negative effect in the short term. If you also close several credit card accounts once they are paid off, you might reduce your credit age, another element that could hurt your score initially. Credit age, or the average length of time your accounts have been open, is a key factor in credit scoring—older accounts contribute positively, while newer accounts can reduce your score.
The long-term benefits: Credit utilization and on-time payments
In the long term, debt consolidation can be beneficial for your credit if handled responsibly. By paying off high-interest credit cards and moving the debt into a single payment, lower-interest loan, you can reduce your credit utilization rate significantly.
Debt consolidation loans can also reduce your overall loan amount by allowing you to take advantage of a lower annual percentage rate (APR) compared to your existing high-interest debts.
How long does it take to see improvement in your credit score?
Using a debt consolidation loan calculator can be helpful in estimating your monthly payments and potential savings before proceeding with consolidation.
The time it takes to see an improvement in your credit score after debt consolidation can vary depending on several factors. Generally, if you make consistent, on-time payments, you could start to see positive changes in your credit score within three to six months. However, more significant improvements might take longer, depending on the amount of debt you have and how well you manage other aspects of your credit, such as credit utilization.
Credit utilization is a key factor in credit scoring models and refers to the percentage of your available credit that you are currently using. It is generally recommended to keep your credit utilization below 30%, as lower utilization rates signal to lenders that you are managing your credit well and not overly reliant on borrowing. Reducing your credit utilization by paying off high-interest credit cards through consolidation can help boost your score over time.
For most people, this doesn’t need to be said, but maintaining a consistent payment history with your new loan demonstrates responsible credit management, which is crucial for your credit health. Payment history is the single most important factor in determining your credit score, accounting for a whopping 35% of it.
Debt Consolidation Calculator
Examples of how debt consolidation can help or hurt
Let’s break down how debt consolidation can impact your credit score with two easy-to-follow examples. These show how things like how much debt you owe, paying on time, and managing your debt can affect your credit score, either for better or worse.
Let’s use an example of a couple of friends of mine; we’ll start with my friend named Emily from the Bronx. She had five credit cards, each with a $3,000 balance, adding up to $15,000 in debt, with high interest rates of around 20%. She decided to combine all her debt into one loan for $15,000 at a lower interest rate of 10%. At first, her credit score went down by 10 points because she applied for a new loan, but as she made regular payments and reduced her credit usage from 75% to 40%, her credit score eventually went up by 50 points. Emily bought us rounds that night at the pub to celebrate.
Now, let’s look at John, a friend of mine from Nantucket. He took out a $10,000 loan at a 12% interest rate to consolidate his debt. But after paying off his cards, he continued using them and racked up an additional $5,000 in debt. His credit usage jumped from 60% to 85%, and because he missed three loan payments, his credit score dropped by 70 points in the simplest of terms, Emily was able to improve her score by keeping her debt down and making payments on time, while John hurt his score by taking on more debt and missing payments.
Debt consolidation vs. other debt management strategies
Debt consolidation is just one of several strategies available to manage and reduce debt, each with its unique pluses and minuses. Choosing the right strategy depends on your financial situation, goals, and the type of debt you have. Debt consolidation allows you to combine multiple debts into a single, manageable monthly payment, typically at a lower interest rate, which can make it easier to keep track of payments and reduce overall interest costs.
Debt consolidation can be an effective debt relief option, but just like anything in life, it’s important to evaluate other solutions like debt management plans and credit counseling to find the best fit. Some of the other solutions are as follows:
Balance transfers
A balance transfer involves moving high-interest credit card debt to a new card that offers a 0% introductory interest rate for a limited time. This can be a good short-term strategy if you can pay off the debt during the promotional period. However, if you don’t pay it off in time, you may face high interest rates again.
Debt settlement
Debt settlement involves negotiating with creditors to pay less than what you owe. This can reduce your debt significantly, but it comes with risks. Debt settlement typically leads to a significant negative impact on your credit score, as it often requires you to stop making payments while negotiations take place.
Debt consolidation
Debt consolidation offers a middle ground. By consolidating multiple debts into a single loan with a potentially lower interest rate, you can simplify your payments and make it easier to manage your debt. Unlike debt settlement, debt consolidation allows you to maintain consistent payments, which can protect your credit score. Compared to balance transfers, it offers more structure, especially for those who need longer-term solutions.
Millions struggle with debt. We help them move on with their lives.
- End your debt stress with a proven, affordable debt relief program. Our consultants will guide you through every step.
- Everyone’s financial situation is different. That’s why we start by giving you a free debt analysis and create a custom solution based on your unique needs and goals.
- Let us help you solve your debt problems and move forward with improving your overall financial health.
Not available in CO, HI, ND, OR, RI, VT, WA, WV, WY, MN, DE, IA.
What types of debt can be consolidated?
Most types of unsecured debt can be consolidated, including credit card debt, personal loans, payday loans, and medical bills. However, secured debts, such as mortgages car loans, or student loans, are typically not eligible for consolidation.
Unsecured debts that can be consolidated:
- Credit card debt
- Personal loans
- Payday loans
- Medical bills
Secured debts typically not eligible for consolidation:
- Mortgages
- Auto loans
Related: Will Debt Consolidation Affect My Ability to Buy a Home?
What are the best practices for debt consolidation?
To ensure debt consolidation helps your credit rather than hurts it, it's essential to practice good financial habits. By following the right strategies, you can avoid common pitfalls and make the most out of your consolidation efforts. Here are a few key tips to keep in mind:
Keep old accounts open. If possible, keep your old credit card accounts open even after paying them off. This helps maintain your credit history and keeps your credit utilization rate low. Closing old accounts can shorten your credit history, which may negatively affect your credit score. Keeping them open shows that you have a longer credit history and more available credit, both of which can help boost your score.
Make timely payments. Set up automatic payments or reminders to ensure you never miss a due date. On-time payments make up the largest part of your credit score—accounting for 35% of it. Missing payments, even by a few days, can have a significant negative impact on your score and may result in additional fees or penalties. Staying consistent with your payments is one of the best ways to rebuild or maintain a healthy credit score.
Avoid new debt. Resist the temptation to use newly available credit after consolidating debt. The goal of debt consolidation is to reduce debt and simplify payments, not accumulate more debt. Taking on new debt after consolidating may put you in a worse financial position and counteract the progress you’ve made. It's important to develop a budget and stick to it, ensuring you only use credit when necessary and responsibly.
Monitor your credit report. Regularly checking your credit report from the major credit bureaus can help you track your progress after consolidation. Monitoring your credit report allows you to see the positive effects of your consolidation efforts over time and address any inaccuracies that may arise. You’re entitled to a free credit report from each of the major credit bureaus once a year, which can be helpful in tracking your financial health.
Create a budget and stick to it. Debt consolidation is a great first step, but without proper budgeting, you may end up in the same situation. Develop a realistic budget that takes into account all your expenses, including your consolidated loan payment. By managing your spending and ensuring you have enough to cover your debt obligations, you can avoid falling back into debt.
Millions struggle with debt. We help them move on with their lives.
- End your debt stress with a proven, affordable debt relief program. Our consultants will guide you through every step.
- Everyone’s financial situation is different. That’s why we start by giving you a free debt analysis and create a custom solution based on your unique needs and goals.
- Let us help you solve your debt problems and move forward with improving your overall financial health.
Not available in CO, HI, ND, OR, RI, VT, WA, WV, WY, MN, DE, IA.
The bottom line
The most important aspects of debt consolidation revolve around simplifying your finances and potentially reducing the stress associated with managing multiple debts. While there may be a short-term drop in your credit score due to credit inquiries or new accounts, the long-term benefits—such as better credit utilization, an improved payment history, and greater financial discipline—can lead to a healthier credit profile. If you would like a healthier credit profile, without your credit having to go the gym and eat vegan, then debt consolidation might be right for you.
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Writer
Benjamin is a writer and entrepreneur who spent 15 years in Asis involved in the real estate and financial services industry. He currently writes about finance, real estate, geopolitics, and short stories involving his cat from Argentina named Tuki. He has written for The Motley Fool, SuperMoney, and other online and offline publications spanning the globe.
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