Does Debt Consolidation Hurt Your Credit?


Debt consolidation may be an option if you’re having difficulties paying your payments or want to get out of debt faster. However, before you go with this debt relief option, you must first understand how it affects your credit, how the procedure works, and what other options you have.

Here’s a closer look at the process of debt

What Is Debt Consolidation and How Does It Work?

Debt consolidation is a type of debt relief that entails taking out a new loan to pay off prior loans, combining the debts into a single monthly payment (consolidation). Debt consolidation can help you get out of debt faster by lowering your interest rate, simplifying your monthly payments, and lowering your monthly payments.

Start by considering your total financial situation when deciding whether or not debt consolidation is a wise choice. If you’re having difficulties paying your bills, are uncomfortable with your current level of debt, or are unhappy with the interest rates (APRs) on your existing credit cards or loans, debt consolidation may be a good option.

However, you should be aware of how debt consolidation may affect your credit score. While paying off debt, keep an eye on your credit score.

What Is the Impact of Debt Consolidation on Your Credit Score?

Debt consolidation may have a positive or negative impact on your credit score. Here are five ways that debt consolidation could improve or hurt your credit score.

It may result in hard credit inquiries.

When you formally request for credit, the creditor does a hard inquiry, also known as a credit pull, to determine your creditworthiness. Each hard inquiry lowers your credit score by a few points on average. Your credit may suffer a brief setback if you shop around and apply for debt consolidation loans at multiple banks at the same time. Fortunately, when your credit score is generated, many hard inquiries within a specified period of time (usually 14 to 45 days) are normally consolidated into one.

It’s important to remember that a hard inquiry isn’t required every time you speak with a lender or go to a website. Without having to go through the onerous inquiry procedure, you may do your research and get prequalified for a loan. Many lenders let you to look for rates and prequalify online using a soft credit check, also known as a soft pull, which does not effect your credit score. This allows you to take the first steps toward determining whether you qualify for a loan without negatively impacting your credit.

Before proceeding with a lender, read the fine print to ensure that you understand whether or not you are willing to have your credit examined with a hard inquiry as part of the loan application process.

It’s possible that your credit utilization will change.

Your credit usage ratio, which accounts for around 30% of your FICO credit score, is important to creditors and credit rating agencies. The percentage of available credit that you’re using at any given time is known as your credit usage ratio. For example, if you have a credit card with a $15,000 credit limit and a $4,500 amount, your credit utilization ratio is 30%.

Your credit score may suffer if your credit use ratio rises as a result of debt consolidation. In the example above, transferring a $4,500 amount from an existing credit card with a $15,000 limit to a new credit card with a $7,500 limit may result in a 60 percent credit usage ratio on the new card, potentially lowering your credit score.

Your credit usage ratio and credit score may improve if you consolidate numerous credit card obligations into a single new personal loan. When calculating your credit mix, which contributes for 10% of your FICO credit score, credit cards and personal loans are considered two independent categories of debt.

Consider the following scenario: you have three credit cards. Using the same example as before:

The first card has a balance of $4,500 and a credit limit of $15,000 on it.
The second card has a balance of $2,000 and a credit limit of $10,000.
The third card has a $5,000 balance and a credit limit of $10,000.

These three cards would have credit utilization ratios of 30 percent, 20 percent, and 50 percent, respectively. (When you add the cards together, your total credit usage is nearly 33%.) If you consolidate all three debts into a single $11,500 personal loan, the credit utilization ratios for each of those three cards will decrease to zero (assuming you leave the credit card accounts active and don’t make any additional purchases), potentially improving your credit score.

Your accounts’ average age may be decreasing.

The average age of your accounts, or how long you’ve had them open, is another element in determining your credit score. This represents your overall credit history and accounts for around 15% of your FICO credit score.

If you create a new credit account as part of your debt consolidation strategy, whether it’s a new balance transfer credit card or a new personal loan, the average age of existing accounts will decrease, and your credit score may suffer as a result. However, the drop may not be significant depending on how many other credit accounts you have and your overall credit history.

It has the potential to improve your payment history in the long run.

Your payment history accounts for around 35% of your credit score. Debt consolidation may not influence this component of your credit score if you already have a good track record of making on-time payments. However, if merging your obligations into a new loan with a reduced interest rate makes it easier for you to make timely payments, debt consolidation may help you improve your credit score over time.

You Might Be Tempted to Close Accounts

It may feel wonderful to close your old accounts after a balance transfer or acquiring a new loan if you’re going through the debt consolidation procedure. But be cautious. Closing a credit account might lower your average account age or increase your credit utilization ratio. Both of these activities can have a negative impact on your credit score.

Consider keeping your old credit accounts open but with zero balances after you’ve completed your debt consolidation process. Keeping such accounts open and on your credit report can help you improve your credit score if you don’t utilize them to build up extra debt.

Debt Consolidation Options

There are various options for debt consolidation:

Loans for debt consolidation.

Personal loans, such as debt consolidation loans, are accessible through banks, credit unions, and online lenders. Lenders may pay off your debt immediately or supply cash to the borrower to pay off their outstanding bills with this form of loan.
Personal loans are loans that are made to individuals.
You take out a new loan from a bank, credit union, or another lender to pay off higher-interest debts, such as credit card debts or other bills, with a personal loan used for debt consolidation.
Credit card for balance transfer.
If your credit is excellent enough, you may be able to transfer the balances of many credit cards to a new balance transfer credit card with a cheaper interest rate, occasionally even a 0% APR for a limited time.
A home equity loan is a type of loan that allows you to borrow
If you own your house and have enough equity to qualify, you may be able to combine your debts at a cheaper interest rate with a home equity loan or a home equity line of credit (HELOC).
Refinancing a mortgage to get cash out.
A cash-out mortgage refinance allows you to refinance your house for a higher amount than the current debt. You can pay off your bills with the difference in cash.

Debt Consolidation Alternatives

There are various more options if you don’t want to take out a new loan, obtain a credit card, or use your home equity to consolidate debt:

You must pay off your bills on your own.

You can establish a strategy to pay off debt faster if your payments are manageable. If you have enough money and room in your monthly budget, you might be able to use the debt snowball or debt avalanche approach to pay off your debts quickly without debt consolidation.
Become a member of a debt management program (DMP).
If you’re having difficulties paying your bills, you can set up a debt management plan with a nonprofit consumer credit counseling organization, in which you agree to pay off your obligations with a single monthly payment to the credit counseling agency, which will then pay your creditors on your behalf.
Make a bankruptcy filing.
If you’re having trouble paying your expenses, don’t want (or can’t be authorized for) any additional loans, and don’t believe you’ll be able to repay your debts, bankruptcy may be an option for you. This legal procedure can help you get rid of part or all of your debts and start over. However, bankruptcy will appear on your credit report for seven to ten years.
Debt settlement should only be considered as a last resort.
If you’ve gone behind on your payments, you might want to talk to your creditors about accepting a lower payment than you owe. This is known as debt settlement, and it can be done on your own or with the help of a debt settlement company. But proceed with caution. Debt settlement is a risky business. Creditors are not obligated to accept your debt settlement offer and may be unwilling to bargain. Furthermore, the debt settlement process is known to have a major negative impact on your credit. It should only be used as a last resort.


Is debt consolidation bad for your credit score? It is debatable. If you’re considering debt consolidation as a way to get out of debt, you should expect a temporary drop in your credit score. Debt consolidation, on the other hand, can help you establish better credit and a more secure financial future if you can manage your payments responsibly and begin to make progress toward debt repayment.

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