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Does Debt Consolidation Hurt Your Credit?

Consolidating debts into one payment and paying as agreed can help your credit and make budgeting easier — but there are risks as well.
April 25, 2019
Credit Score, Paying Off Debt, Personal Finance
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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.

See how your score might change

Before you take action, use our credit score simulator to see how financial decisions may impact your score. Get your actual credit score, too.

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.
  • 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.

  • Home equity loan or line of credit: Will be reported as an installment loan or revolving account, depending on which you get. You’ll also get hit with a credit check.
  • 401(k) loan: Does not appear on your credit report, so it has no effect on your credit score.
  • Debt management plan: Seeing a credit counselor and signing up for a debt management plan does not directly affect your credit score, but negotiating to pay less than the full amount due or closing credit cards can hurt your score. A DMP is noted on your credit report while it is in effect, but not after the plan is completed.