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Can Debt Consolidation hurt Your Credit Score?

Consolidating debts into one installment that’s more manageable can benefit your budget and credit however, there are also dangers.

By Bev O’Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O’Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She has a bachelor’s degree in journalism from Auburn University and a master’s in education from Georgia State University. Before coming to NerdWallet she was employed by the daily papers, MSN Money and Credit.com. Her work has appeared in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and other publications. Twitter: @BeverlyOShea.

January 1st 2023

Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years at The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Previous experience included copy and news editing for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor’s degree in mass communication and journalism from The University of Iowa.

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Consolidating debt can reduce the monthly payment, but it could also result in an occasional dip on your score. Two typical debt consolidation options are getting a or a .

Every credit application usually triggers a on your credit, which can lower the score of your credit by several points for several months. But the overall credit effect of consolidating debt should be positive, if you make sure you pay on time and change the habits which caused the debt to pile up.

We’ll take a closer analysis of the possible effects on your credit when you consolidate debt with the use of a personal loan or credit card for balance transfer, plus some alternatives to consolidate debt.

Know how your credit is assessed

Find your free score and the factors that impact it, and get suggestions on how to keep building.

How debt consolidation affects your credit score

The combination of several debts is which is typically with a lower interest.

With fewer bills to handle, it aids in budgeting. And cutting the interest rate will help you pay it off faster because a greater portion of your payments go towards debt rather than the interest.

Consolidating debt using the help of a personal loan

Pros:

Generally requires a lower credit score to get approval for a balance transfer card. (Not sure where you stand? Check your with NerdWallet.)

This can improve your situation If you only had credit cards since it’s an installment loan.

You can combine multiple payment into one, making it easier to manage your finances.

through lowering the amount of your credit limits you’re using by transferring credit card balances onto an installment loan.

Cons:

It could result in more debt if you take all the space available on credit cards.

If you end up overextended and in a position to not pay, missed payments will affect your credit.

You may pay high fees for borrowing money if you do not know the APR.

The loan may have an early payment penalty, locking you into a fixed date for repayment.

>> MORE:

Consolidating debt by using the use of a balance transfer card

Pros:

You might be able to negotiate an interest rate that is lower (often for a set time), including a 0% APR for excellent credit customers.

Payments are more flexible than with loans. loan.

No prepayment penalty.

Cons:

Your score may initially fall because you’re using a lot of the new credit limit of the card.

There could be interest due if you don’t pay off the debt before the introductory rate runs out.

Other options for debt consolidation

If these options don’t appear like a good fit, there are other These may impact your credit score.

It’s not an ideal idea to substitute unsecured debt (like credit card debt) with secured debt (like the mortgage or car loan) since you may lose your home or your vehicle if you can’t pay.

: This will be reported either by way of either an installment loan or revolving account, dependent on the loan type you get. Additionally, you’ll have to pay for a an credit check.

A debt management plan (DMP): Talking to a credit counselor and enrolling in a DMP does have no direct impact on your credit score, however bargaining to pay less than the full sum due, or ending credit accounts can affect your score. A DMP is recorded in your credit file as it is in effect, but not after the plan is completed.

It’s not listed on your credit report, which means it has no effect on the credit rating. However, you’re sacrificing investment returns The effect will increase as time passes. This should be considered a last resort.

Author bio Bev O’Shea is a former credit writer at NerdWallet. Her work has been featured in publications such as the New York Times, Washington Post, MarketWatch and elsewhere.

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