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Does Debt Consolidation Hurt Your Credit?

Credit Score, Paying Off Debt, Personal Finance
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Debt consolidation can help or hurt your credit, depending on how you do it and what you do next.

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

Common approaches are using a balance transfer credit card or personal loan, but you can also borrow against your home equity, 401(k) or life insurance.

How debt consolidation can help your credit

Consolidating your debt is likely to help your credit score if:

  • You pay the consolidated debt on time every month. On-time payments have the biggest effect of all the things that make up your credit score.
  • Consolidation helps you pay down credit card balances that are higher than 30% of the credit limit on that card. The amount used compared to your limit is called credit utilization, and it has a big effect on your score.
  • You had only revolving credit accounts (like credit cards) and consolidated with an installment loan (like a personal loan). Having more than one type of credit account can help your score a bit.
  • You have addressed the problems that led to the original debt, so you have a good shot at paying down debt and keeping it down

How debt consolidation can hurt your credit

You may see a drop in your credit score if:

  • You run up balances again once you have “room” on your cards. The gain you saw from dropping credit utilization will be erased as soon as balances rise again.
  • You move so much debt to a balance transfer card that it’s near its limit, resulting in high credit utilization
  • You close most or all of your remaining credit cards, cutting into the overall age of accounts and driving up overall credit utilization on the remaining ones
  • You pay the consolidated debt 30 days (or more) late; since payment history has a big effect on your score, letting any account fall delinquent can really hurt
  • You apply for balance-transfer cards or personal loans you can’t qualify for, because each application can ding your score a few points. And a flurry of credit applications at once can lower your score because it may be seen as a sign of financial instability.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.