Does Debt Consolidation Hurt Your Credit?

Consolidating your debt can lower your monthly payments, but it can also cause a temporary dip in your credit score.

Two common debt consolidation approaches include getting a debt consolidation loan or a balance transfer card. Both types require a hard inquiry on your credit, which can lower your credit score by a few points.

But if you change the habits that led to debt and pay on time, every time, the overall effect should be positive.

Here’s a closer look at the potential impact on your credit when you consolidate your debt with a personal loan or balance transfer credit card.

How debt consolidation can affect your credit

Debt consolidation combines several debts into one, ideally with a lower interest rate and a faster payoff. Having fewer payments to juggle and saving on interest can help you pay off debt.

Consolidating with a personal loan

Pros:

• Generally requires a lower credit score for approval than a balance transfer card. (Not sure where you stand? Check your free credit score with NerdWallet.)

• Can help improve credit mix if you had only credit cards before, because it is an installment loan.

• Can combine several payments into one, simplifying your finances.

• Can improve credit by lowering the amount of credit limit you're using, known as credit utilization, if unsecured credit card bills are moved to an installment loan.

Cons:

• It can lead to even more debt if you use newly available space on credit cards.

• If you end up overextended and unable to pay, late payments can damage credit.

• Paying high fees to borrow money (be sure you understand the APR).

• Having a prepayment penalty (some do not, so check).

» MORE: Best debt consolidation loans

Consolidating with a balance transfer card

Pros:

• Lower interest rate (often for a set time), including a 0% APR for excellent credit consumers.

• Flexible payments.

• No prepayment penalty.

Cons:

• A lower credit score because of high credit utilization.

• Not paying off the debt before the offer runs out (the downside of flexible payments), resulting in higher interest rate.

Other options

If those options don’t seem like a good fit, there are other debt consolidation options that also can affect your credit.

Keep in mind it’s generally not a good idea to replace unsecured debt (like credit card debt) with secured debt (like a mortgage or car loan) because you could lose your home or vehicle if you can’t pay.