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Personal Loans

Does Debt Consolidation Hurt Your Credit?

Debt consolidation allows you to combine multiple debts into one, streamlining your monthly payments. Consolidating debts can also save you money on interest, depending on which consolidation option you choose. 

Does debt consolidation hurt your credit score? It can—borrowing money often involves a credit check. But over time, consolidating debts could help your credit score if you build a positive payment history. 

Understanding how debt consolidation affects your credit can help you decide whether it makes sense. 

In this guide:

How does debt consolidation work?

Debt consolidation works by allowing you to borrow money to pay off debts. You then make one monthly debt payment going forward. 

There are different ways to consolidate debts. The type of debt you have can influence which debt consolidation option you choose and how much you pay. Here’s how some of the most common debt consolidation methods compare. 

If you have…You might choose…How it worksPros and cons
High-interest credit card debt < $15,000A 0% balance transfer credit card offerOpen a new card with a 0% APR, and transfer your balances. You then make 1 monthly payment to the balance transfer card. Balance transfer offers can save money on interest. 

Promotional rates have an expiration date, and balance transfer fees may apply. 
High-interest credit card debt > $15,000A debt consolidation loan with a low, fixed interest rateYour lender gives you a lump sum you can use to pay off credit card balances. You then make 1 payment to the loan each month. Debt consolidation loans can give you more time to pay off what you owe with predictable payments. 

Pay interest, and some lenders also charge an origination fee. 
Student loansA private student loanYour lender uses your new loan proceeds to pay off your loans. You then make payments to the new lender until you repay the loan.Private student loan refinancing can help you combine debts and get more favorable repayment terms. 

Consolidating federal student loans into private loans can strip you of certain benefits, such as forbearance, deferment, and loan forgiveness options. 
Multiple unsecured debts, such as credit cards, medical bills, or installment loansA home equity loan  or home equity line of credit (HELOC)With a home equity loan, your lender approves you for a lump sum, which you can then use to pay off debt. 

A HELOC Is a revolving credit line you can draw against as needed. 
You may be able to borrow more money for debt consolidation if you have significant equity in the home. 

Home equity loans and HELOCs use your home as collateral. 
Multiple unsecured debts, such as credit cards, medical bills, or installment loansCash-out refinanceGet a new mortgage loan to replace your current one, and take your equity out in cash at closing. You then repay the new mortgage.Cash-out refinancing can provide cash for debt consolidation or other expenses. 

You’ll have a higher mortgage balance and potentially higher monthly payments. 

Consolidating unsecured debts could be wise if you want to make just one debt payment. Depending on how you combine them, you might be able to save money on interest. However, it’s essential to understand that if you’re using a home equity loan or HELOC to consolidate unsecured debts, you’re turning them into secured debts. 

It’s also essential to weigh the pros and cons of combining federal and private student loans. Student loan refinancing could make repaying your loans easier on your budget, but you’ll forego many built-in protections that come with federal student loans. With any debt consolidation option, it’s helpful to calculate your potential savings. 

Does debt consolidation hurt your credit?

Lenders can perform a hard credit check when you apply for a balance transfer credit card, debt consolidation loan, student loan refinancing, or a home equity loan. Hard inquiries account for 10% of your FICO score, and each can cost you a few points. However, the inquiries only affect your score for 12 months. 

Debt consolidation can also hurt your score since you’re taking on new debt. Amounts owed account for 30% of your FICO score. However, the way you consolidate debt can make a difference in how significant the impact on your score is. 

FICO score calculations distinguish between revolving credit lines, such as credit cards and installment loans. A debt consolidation loan or home equity loan would fall into the latter category. Revolving credit line utilization tends to carry more weight than installment loans for credit scoring. 

Does debt consolidation help your credit score?

You might see initial negative credit score impacts, but debt consolidation could help to raise your score over time. Again, it goes back to the way credit scores are calculated. FICO credit scores give the most weight to payment history and credit utilization

So what does that mean? If you’re practicing good credit habits, consolidating debt could help you raise your score over time. That includes:

  • Making on-time payments to your new creditor. 
  • Not charging new purchases to any credit cards you’ve paid off. 
  • Keeping older accounts open to boost your credit age. 
  • Only applying for new credit if it’s necessary. 

FICO doesn’t specify how long it takes to see an improvement in your credit scores after consolidating dates. But as a general rule, it can take at least six months to establish history, so a similar time frame may apply. 

How to decide whether debt consolidation makes sense

Is debt consolidation a good option? The answer is different for everyone, depending on the specifics of your debt and finances. 

You might be a good candidate for consolidation if you:

  • Need or want to make your debt payments more manageable. 
  • Would like to reduce your interest rates to save money. 
  • Have analyzed your budget and know how much you can commit to debt repayment each month. 
  • Are committed to avoiding debt while focusing on paying off debts you’ve consolidated. 
  • Know your credit scores are sufficient to get approved for a debt consolidation option, such as a loan or balance transfer offer, at favorable terms. 

Debt consolidation may not work for someone who’s not ready to give up bad spending habits. For instance, say you take out a $10,000 personal loan to consolidate credit card debts. But once you pay off the cards, you charge up another $10,000. 

Now you have double the debt and double the payments. That could put additional strain on your budget and hurt your credit score. In a worst-case scenario, continuing the same debt patterns could lead you to file bankruptcy. 

Asking yourself what you hope to achieve with debt consolidation and what you’re willing to do to make it work can help you decide whether it’s a good fit. 

How to pursue debt consolidation

If you’d like to consolidate debts but you’ve never done it, you might not know where to start. Following a checklist can make the process easier. 

  1. Decide which debts to consolidate. Which debt consolidation method you choose can depend on the type of debt you have and what you owe. Listing your debts can make it easier to select a debt consolidation option. 
  2. Assess your goals. Do you want to consolidate debt to save money on interest? Or are you trying to reduce your monthly payments? Having clear goals in mind is helpful when comparing debt consolidation strategies.
  3. Check your credit. Checking your credit scores can give you an idea of what kind of loan terms or balance transfers you might qualify for. You may also be able to gauge what interest rates you’ll pay.  
  4. Choose a debt consolidation strategy. As we mentioned, there’s a difference between credit card refinancing and debt consolidation. At this step, you must decide which makes more sense based on what you owe and your goals.
  5. Shop around. If you’re ready to borrow, you have more than one option for debt consolidation loans or balance transfer cards. Comparing rates, fees, and terms can help you find the best borrowing avenue. 
  6. Apply for debt consolidation. Once you’ve selected a lender or credit card, you’ll need to apply for a loan or line of credit. That means submitting an application with your personal information and information about your debt. 

How you consolidate your debts once approved will depend on how you choose to borrow. With credit card balance transfers, the credit card company will handle the debt payoff for you. With consolidation loans, the lender may pay creditors, or you might use the loan proceeds to pay them off. 

Alternatives to debt consolidation

Consolidating debt isn’t the only way to pay it off if you’re worried about credit score impacts. Other possibilities you might consider include the following:

  • Debt management plan (DMP)
  • Debt negotiation
  • Borrow from friends and family 

With debt management, you work with a credit counselor or debt counselor to create a payment agreement with your creditors. You make one payment to the DMP, which is split among your creditors. Meanwhile, your creditors may agree to waive certain fees or reduce your interest rates. 

A DMP could make sense if you have credit card debt and aren’t behind on your payments. On the other hand, you might consider negotiating debts instead if your accounts aren’t current. Negotiating debt could allow you to settle for less than you owe, but it can damage your credit score and increase your tax liability on the amount of credit that’s forgiven. 

You might also ask friends and family to loan you the money you need to pay off debts. That wouldn’t affect your credit scores. However, you’d need to be sure you can repay the money. Unpaid debts could strain your relationships.