Bills Logo

How does debt consolidation affect my credit score?

How does debt consolidation affect my credit score?

Get rid of your debt faster with debt relief

Choose your debt amount

See if you qualify

Or speak to a debt consultant  844-731-0836

Daniel Cohen
UpdatedJul 17, 2024
  • clock icon
    5 min read
Key Takeaways:
  • Debt consolidation has both negative and positive impacts on your credit score.
  • In the short term, a hard inquiry can hurt your credit.
  • The most crucial factor is to make sure your payments are affordable.

Debt Consolidation Affects Your Credit

Here are the main ways debt consolidation affects your credit:

  1.  A hard credit inquiry can temporarily hurt your credit. 
  2.  If you take a debt consolidation loan and pay off your credit cards, your credit utilization will go down, and your credit score will rise.
  3. If you make your payments on time, then in the long-run, your credit will increase.

 Different types of debt consolidation and your credit

Debt consolidation is combining multiple debts, usually from multiple creditors, into one debt with a new creditor. Here are some different ways that you can consolidate debt.

You can shop around with online lenders and get quotes without hurting your credit score. Lenders can pre-qualify you for a debt consolidation loan using a soft pull. However, to get approved and take a loan, the first three options require a hard credit pull that negatively affects your credit, at least in the short-term. 

Debt Consolidation Loan

A personal loan will reduce your credit utilization, too, and boost your score. You can also improve your score by increasing the variety of credit accounts, especially if you have no installment loans that currently report to the bureau. In general, the higher your credit, the better rates you get on your debt consolidation loan. However, even if you have bad credit, consider a debt consolidation loan if the overall interest rate is lower than your current credit cards. The joint effect of on-time payments and lowering your overall credit utilization will improve your credit.

Cash-out refinance Loan

Using your home equity has risks, but should improve your credit. Mortgages have extended payment terms and lower monthly payments. A great reason to consider this debt consolidation option is to create affordable monthly payments. The main factor in your credit score is timely payments. Also, a mortgage lowers your credit utilization by paying off your credit card debts and increases your credit score.

Balance Transfer

In order to benefit from a balance transfer, you need excellent credit. Don't forget to check the terms and the length of the "teaser" introductory rates. Also, consider the affordability of the balance transfer fees. A balance transfer is likely to harm your credit if you use a large percentage of the new card's credit limit to pay off your other cards. If you use your balance card transfer wisely, you will both save money and increase your credit score.

Retirement account loan

Borrowing from your retirement account requires no credit inquiry. While there is no harm to your credit, there are definite potential downsides to a 401k loan, such as potential tax penalties and liabilities if you don't pay it back as agreed and slowing down the growth of your retirement funds.

Your credit score's impact is not the primary reason you should choose any of these debt consolidation options. Make your choice based on what can get you out of debt at a lower or more affordable monthly cost.

Debt Consolidation Can Have Multiple Meanings

Another source of confusion in assessing how debt consolidation affects your credit is that "debt consolidation" is used to mean more than the debt consolidation loan options reviewed above, all of which involve paying off your original debts with new debt. Debt consolidation is also used to describe two debt solutions that don't pay off your current debts but consolidate your payments, so you are working to resolve your debts while making one monthly payment. These two options are::

  • Debt settlement, where you may be able to pay off your debts at a fraction of your balance.
  •  A debt management plan (DMP) offered by a Consumer Credit Counseling Service can reduce your interest rates and shorten the time it takes to get out of debt.

Debt settlement hurts your credit in the short-term. Creditors are willing to settle debts only when they have gone delinquent, and the delinquencies are reported to the credit bureaus and harm your credit score. 

A credit counseling service's debt management plan requires you to stop using credit and often close all the accounts you enroll. The consequence is that it hits your credit utilization, so even though the notation that your accounts are being managed by a third-party doesn't directly lower your score, the practical effects of the program will.

If you are in financial hardship and less concerned about your credit's negative impact, then these are debt consolidation options to consider.

Debt consolidation: How your credit affects your options

When choosing the right debt consolidation solution, your options are limited by your current credit score.

  • An unsecured personal loan requires excellent credit to get the best rates. It is possible to qualify for an unsecured personal loan with fair or even poor credit, but rates can be 30% or higher.
  • Balance transfers require solid credit. They are also only a good option for you if you can pay down the debt significantly during the period the interest rate is low. Shop around to find the lowest rate for the longest time and pay attention to the fees.
  • Using the equity in your home will generally have lower rates than a personal loan, even for borrowers with credit scores above 620, as long as they are current on their mortgage and have sufficient income to make the new mortgage payment.
  • Borrowing from your retirement has no credit requirements

Your credit is essential in determining the type of options available and how much they cost. However, when choosing a debt consolidation options, make sure the payments are affordable. That is the most significant consideration in how debt consolidation affects your credit.

Get rid of your debt faster with debt relief

Get rid of your debt faster with debt relief

Take the first step towards a debt-free life with personalized debt reduction strategies.

Choose your debt amount

Get started now

Or speak to a debt consultant  844-731-0836

Dealing with debt

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Auto loan debt was $1.62 trillion and credit card was $1.12 trillion.

A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.

The amount of debt and debt in collections vary by state. For example, in Iowa, 20% have any kind of debt in collections and the median debt in collections is $1500. Medical debt is common and 9% have that in collections. The median medical debt in collections is $526.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.



HHelen Anold, May, 2023
After enduring the toughest 5 years of my life, I have finally achieved the goal of owning a house! My credit score had taken a major hit due to some poor choices I had made, but things turned around when I connected with a credit repair specialist 7 months ago. Upon reading positive reviews about their services, I reached out to them via email at REVIVE(at)TECHIE(dot)COM Thanks to their expertise, my credit score has now soared to the high 700s