Does Debt Consolidation Hurt Your Credit?
Credit score impact: Debt consolidation can temporarily hurt your credit score due to a hard inquiry when you apply and a reduction in the average age of your accounts, but the dip is typically small and short-lived for most borrowers.
The long-term outlook can be positive: Paying off high-balance credit cards through consolidation lowers your credit utilization ratio and may produce a score improvement in as little as 30 to 60 days.
A debt management plan may affect your score: The plan itself isn’t included in FICO scoring, but changes to accounts or payments associated with the plan may affect your credit.
Debt consolidation can make your monthly payments more manageable, but taking out a new personal loan can temporarily hurt your credit.
The dip comes from a hard inquiry and a lower average age of your accounts. In the long term, though, you'll see your score increase again once you're consistently making on-time payments and reducing how much debt you're carrying. There are certain scenarios when debt consolidation can have a long-term, negative impact on your score — here's what you should know.
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Quick Take
Debt consolidation can hurt your credit score in the short term, but it can boost your score in the long run by making debt easier to pay off.
You have several debt consolidation options, and each of them has different impacts on your credit score and payment plans.
Debt consolidation isn’t right for everyone, so it’s best to consider your financial situation and credit score before taking drastic action.
What Happens to Your Credit Score After Debt Consolidation?
Debt consolidation will affect your credit score. It will have an immediate impact, while the long-term result depends on how you approach your new payment plan.
Short-Term Impact
Debt consolidation can cause a small, temporary dip in your credit score. This is usually short-lived and depends on the option you choose.
Here’s why it may impact your score:
Hard credit inquiry: Applying for new credit may lower your score by around five points or more.
New account impact: Opening a new account can reduce the average age of your credit history.
How long does debt consolidation stay on your credit report? Overall, the short-term impact is limited for most debt consolidation options. In the long term, too, having a debt consolidation loan adds variety to your credit mix. So if you only have credit cards, for example, this can be a positive.
Did You Know?
A debt management plan may affect your credit score, since FICO doesn't include that plan when factoring in the score. However, missing payments or closing accounts can affect your credit history and utilization. You may find it easier to recover from the short-term credit impact of personal loans, home equity loans, home equity lines of credit (HELOCs) and balance transfers.
Long-Term Impact
Debt consolidation can improve your credit score in the long run by making it easier to pay off debt. Each on-time payment will give your credit score a small boost.
Here's how it can help:
On-time payments: Consistently paying on time can gradually improve your credit score.
Lower credit utilization: Paying off high balances can reduce your utilization ratio.
Here's an example:
An $8,000 balance on a $10,000 limit = 80% credit utilization, which is high
Paying it off with a personal loan = 0% utilization
Even if you get a balance transfer card with the same limit, you are still reducing your utilization ratio.
How does debt consolidation affect credit utilization? A credit utilization ratio starts to help your credit score if it is below 30%, but the best growth happens when your credit utilization ratio is below 10%.
Good to know: Only revolving credit lines are included in your credit utilization ratio. Personal loans and home equity loans are not included.
Credit Impact Timeline
Here's how your credit score can change over time once you start the debt consolidation process:
Day 0: Requesting new credit may trigger a hard credit check. Opening a new account also lowers the average age of your credit accounts, but the impact isn't large.
30 to 60 days: At this point, you have a more beneficial credit utilization ratio after paying off credit card debt or transferring your balance.
3 to 12 months: The effects of the new account and hard credit inquiry become less of a factor in your credit score. Having a low credit utilization and a steady payment history have greater impact on your score.
24 months or longer: Your credit score should be higher in the long run if you make on-time payments. Some people may be debt-free at this point, depending on their original credit card balance and how aggressively they were able to cut down on debt.
When Can Debt Consolidation Hurt Your Credit?
While debt consolidation can streamline your finances and improve your credit over time, it's important to understand the pros and cons of debt consolidation before moving forward.
Missing payments will result in negative items on your payment history.
Adding new debt will increase your balances and result in higher interest payments, which can lead to financial stress and difficulty with making payments.
Relying on repeated debt consolidation instead of paying off the balance can create a loop. You'd be taking on new credit, additional fees and a lower credit score each time, so it's best to prevent this before it begins.
Don't pile up the late fees and missing payments. If you have to rely on bankruptcy as a last-ditch effort, that can have more negatives for your credit report, affecting it for seven to 10 years after. Here's more on how to recover from bankruptcy.
If you're considering debt settlement instead of debt consolidation, see what paid in full vs. settlement means, so you can better understand how lenders might view that on your credit report.
What Are the Different Types of Debt Consolidation and Their Credit Impact?
You have several options for debt consolidation. Balance transfers, personal loans and home equity loans have their strengths and weaknesses. If you're new to this strategy, it can help to understand how debt consolidation loans work before choosing the right option.
Method | Short-term impact | Long-term impact | Fees | Best for |
|---|---|---|---|---|
Balance transfer | Lower credit score | Higher credit score and possibility of zero interest payments | 3% to 5% balance transfer fee | People with good credit scores |
Personal loan | Lower credit score | May improve credit score by making on-time payments and lowering balances | Origination fee ranging from 1% to 2% in most cases, but higher fees for low credit consumers | People who want fixed payments with definitive payoff date |
Home equity loan or HELOC | Lower credit score | May improve credit score by making on-time payments and lowering balances | Origination fee and closing costs that range from 2% to 6% of the balance | Homeowners with equity who are willing to use their house as collateral |
Debt management plan | May temporarily lower credit score | May improve credit score by making on-time payments and lowering balances | One-time setup fee and monthly service fee | People with bad credit and no easy path to paying off debt |
Hoping to buy a house soon? Debt consolidation may affect buying a home and your mortgage application, potentially changing your credit score and debt-to-income (DTI) ratio.
Real Cost Example: $8,000 in Credit Card Debt
Here's how the numbers might look if you're consolidating an $8,000 balance. This amount is the same as the example used earlier.
Method | Terms | Total Cost |
|---|---|---|
Balance transfer | 0% APR for 18 months, 3% transfer fee | $240 if paid off before the promo period ends |
Personal loan | 12% APR over 3 years, 2% origination fee | ~$1,729 ($160 fee plus ~$1,569 in interest) |
A balance transfer can be less costly if you can pay it off during that 0% APR window. If a balance remains after the promo expires, though, the higher APR, which is often 20% or more, begins, and your cost will add up fast.
A personal loan will cost more overall, but you have a fixed payment and a guaranteed payoff in three years, so you don't risk having your interest rate go up unexpectedly.
Is Debt Consolidation Right for You?
Debt consolidation is a popular option for people who have high-interest credit card debt and want to secure a lower rate. If you’re considering this approach, it may also help to learn how to get a personal loan for debt consolidation before getting started.
Good Fit if:
You have many small balances on various credit cards that are difficult to manage
You can secure a lower APR through debt consolidation than what you're getting from your current card
You want manageable monthly payments with a defined payoff date
You have a good credit score
Not Ideal if:
You have a bad credit score
You can pay off the current debt within one to two months
How Do You Protect Your Credit During Debt Consolidation?
Your credit may take a small hit during debt consolidation since you will have to apply for new credit while reducing the average age across your debt. However, there are ways to limit the damage.
If possible, look for a lender that will only run a soft credit check. Then, your score won’t take an initial hit. It’s possible to find these types of lenders if you only need to borrow a few hundred dollars.
Ensure your payments are made on time.
Keep your credit cards open after you have paid them off to preserve a low credit utilization ratio.
Regularly track your credit score to ensure you are moving toward your goals and that fraudulent activity is not taking place.
Final Takeaways
Debt consolidation will hurt your credit score in the short run, but it can lead to tremendous benefits in the long run for your credit score and overall finances.
While consolidating debt can be a good way to secure a lower interest rate, it can also enable bad spending habits if you do not change the behavior that put you into deep credit card debt.
A higher credit score will give you more financing options and competitive rates, but there are still debt consolidation options for people who do not have the best credit.
Making on-time payments is the best way to boost your credit score after consolidating your debt.
Key Terms
Hard inquiry: A credit check triggered when a lender reviews your credit report to make a lending decision. It can lower your credit score by a few points and typically remains on your report for up to two years.
Credit utilization ratio: The percentage of your available revolving credit you're currently using. Keeping it below 30% helps your score, and the strongest gains tend to come when it falls below 10%.
Credit age: A measure of how long you've held your credit accounts on average. Opening a new account lowers this average, which can temporarily reduce your score.
Payment history: Your record of on-time and missed payments. It's the most heavily weighted factor in your credit score, so consistent on-time payments after consolidating can steadily improve your standing.
Debt management plan: A repayment program arranged through a credit counseling agency. The plan itself isn't included in FICO scoring, but changes to accounts or payments made as part of the plan may affect your credit.
Balance transfer: Moving existing credit card debt to a new card, often with a low or 0% introductory APR, to consolidate and reduce interest costs.
Soft credit inquiry: A credit check that doesn't affect your credit score. Some lenders use soft pulls to show you prequalified rates before you formally apply.
Sources
Consumer Financial Protection Bureau (CFPB): What is a debt consolidation loan?
CFPB: What is a credit score?
myFICO: What is credit utilization?
Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.
Sarah Hostetler contributed to the reporting for this article.
Photo credit: kate_sept2004 / Getty Images
FAQs
Debt consolidation will slightly hurt your credit when you take out a loan or a line of credit. However, it can have significant long-term benefits if you make on-time payments. It also decreases your credit utilization ratio, which will translate into a higher credit score in the long run.
Debt consolidation can affect your credit score for up to one year. It can stop affecting your credit score in as little as three months, especially if you make on-time payments and reduce your utilization ratio.
You should keep old credit cards open to maintain a good credit age and keep your credit utilization ratio low. It only makes sense to close old cards if they have excessive annual fees or if having additional credit lines can lead to overspending.
A balance transfer can help your score in the long run by reducing your credit utilization ratio and giving you the opportunity to pay off your credit card with 0% APR for up to 24 months. However, a balance transfer, like the other methods, will trigger a hard credit check, which will temporarily reduce your credit score.
No. Any loan or credit card applications you submit within a 14-day period will all count as a single hard credit inquiry. If you submit all of your applications in a short stretch instead of spreading them out over several months, the impact on your credit score will be limited.
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