Does debt consolidation hurt your credit?

By Rebecca Lake

Reviewed by Jill Cornfield

May 20, 2024

Read time: 6 min

Young woman lounging on sofa with hands behind head and daydreaming

Key takeaways:

  • Debt consolidation may cause a temporary credit score decrease, but it could have a positive effect in the long term. 

  • There are several ways to consolidate debt and streamline payments. 

  • You might consider alternatives to debt consolidation if you've already fallen behind on payments.

Facing debt can feel confusing, frustrating, and a little scary. Approaching potential solutions with caution is a financially smart move. Debt consolidation is likely to impact your credit profile in a few ways. Let’s explore what they are and how you could use debt consolidation on your path to a better, more manageable financial situation. This isn’t just about surviving your financial situation. It’s about thriving within it.

Understanding the impact of debt consolidation on credit scores

Debt consolidation means combining debts so you have fewer monthly payments to make. Generally, people do this by using a debt consolidation loan (there are different kinds) or a balance transfer credit card. They don't work the same way, but they can all affect your credit scores. 

Why? Because applying for new credit affects your credit profile, and so does the way you handle your accounts. The impact can be positive, negative, or a little of both.

Positive effects of debt consolidation on credit score

Can debt consolidation help your credit score? Yes, though it might take some time for the effects to show up.

Here's how consolidating debts could give your credit score a boost.

  • Consolidating debts could help you create a positive payment history. Making on-time payments is the most important thing you can do to improve your credit profile. If you consolidate debts so that you have just one payment to make each month instead of several, you could reduce the chance of missing a payment. Paying on time consistently could have a positive effect on your credit profile and show lenders that you know how to use debt responsibly. 

  • Your credit utilization ratio might improve. Credit utilization is how much of your credit limits you're using on your credit cards. If you have a $100 balance on a credit card that has a $500 credit limit, your utilization is 20%. Higher utilization tends to have a negative effect on your credit profile. One benefit of debt consolidation is that when you pay off credit card debts with a debt consolidation loan, that could bring your credit utilization ratio down and have a positive effect on your credit score.  

  • You can diversify your credit mix. One factor in your credit score is whether you have experience with different types of credit, such as installment loans and credit cards. If you don’t have experience with an installment loan, getting one could round out your credit mix, which could reflect positively on your credit profile.

Potential negative effects of debt consolidation on credit score

Here's how debt consolidation could ‌have a negative impact on your credit.

  • You will probably get a new inquiry on your credit report. When you apply for a debt consolidation loan or a balance transfer credit card, the lender will almost certainly do what's called a hard credit check or hard pull. That means a creditor checks your credit history because you applied for credit. This type of inquiry shows up on your credit reports, and each hard credit check could temporarily knock a few points off your score. 

  • Your credit age can change. Credit age is the average number of years your credit accounts have been open. If you have a 10-year-old account and a 5-year-old account, your average credit age is 7.5 years. If you add a brand new account, the average drops to five years. Adding a new loan or line of credit to the list can shorten your credit age and ding your score a little. 

The biggest risk with debt consolidation is that you add to your debt. A common pitfall of debt consolidation is to pay off high-interest credit cards with a new debt consolidation loan, and then run the balances back up on those paid-off credit cards. If that happens, you could end up even deeper in debt than before and your credit score could drop. 

Protecting your credit score during consolidation

If you're thinking debt consolidation is a good idea, it helps to know how to minimize any fallout with your credit score. Here are a few tips for preserving your credit score as much as possible when combining debts. 

  • Shop around for the right lender. Comparing rates, fees, and loan terms could help you choose the best loan before you apply, which means that hopefully you’ll only need to apply for one loan. That minimizes the number of hard credit checks on your credit profile. Talk with lenders that will let you check your rates without affecting your credit scores. 

  • Automate payments if you can. Automating payments could help you protect your credit profile by avoiding late payments. An alternative is to set up due date reminders so you always know when it's time to pay your loan. 

  • Hold off on applying for new credit. While credit inquiries have a relatively small impact on your credit profile, it's still good to limit them if you can. Only apply for new credit while you're paying off your consolidation loan if it's absolutely necessary. 

  • Don't create new debt. Charging up your credit cards after you consolidate debts is a bad idea. Not only could it harm your credit, but it could also leave you in a more challenging financial position.  

Read more: How to get a debt consolidation loan

What's next

Rebecca Lake - Author

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

Jill Cornfield

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

Frequently asked questions

Not always. Some people may be better off choosing an alternative, such as a DIY debt payoff method or a debt management plan (DMP) supervised by a credit counselor. If you have a financial hardship and can’t afford to fully repay your debts, debt resolution may be an option to consider. That’s getting your creditors to agree to accept less than the full amount you owe but consider it payment in full. The difference is forgiven. In some cases, filing bankruptcy may be the best solution for dealing with overwhelming debt. 

Whether you use a balance transfer credit card, personal loan for debt consolidation, or home equity loan to combine debts, they could all trigger a hard inquiry on your credit reports which could lower your score by a few points. All three strategies could help improve your credit utilization and improve your credit standing. Using a loan to consolidate debt could improve your credit mix if you didn't have any loans previously. 

Poor credit could make it harder to qualify for a new loan with an interest rate that’s lower than what you’re currently paying. It usually doesn’t make sense to consolidate debts with a loan that has a higher interest rate. There are lenders that offer debt consolidation loans for bad credit and you’ll have to talk with them to find out what you’re eligible for. Try to avoid applying until you’re fairly certain you’ll get a loan that works for you, because each hard credit inquiry can temporarily ding your score by a few points.

It’s possible to make a plan to get rid of debts with bad credit. Get a free debt evaluation and let an expert walk you through the options that might make the best sense.

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