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Does Debt Consolidation Hurt Your Credit Score?

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Do Debt Consolidation Loans Hurt Your Credit?

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

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 holds a bachelor’s degree of journalism at Auburn University and a master’s in education from Georgia State University. Prior to joining NerdWallet, she worked for daily newspapers, MSN Money and Credit.com. Her work was featured on The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and elsewhere. Twitter: @BeverlyOShea.

February 1 2023

Edited by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years with The Oregonian in Portland in roles including copy desk chief and team director of design and editing. Her previous experience includes news and copy editing for many Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s in mass communications and journalism at The University of Iowa.

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Consolidating your debt can lower the amount of your monthly payments, however it also can cause an occasional dip of your credit rating. Two popular debt consolidation strategies are getting a or a .

Any credit application typically triggers an impact on your credit score that can reduce the score of your credit by several percentage points over a few months. But the overall credit effect of debt consolidation is positive, provided you make sure you pay on time and alter the behavior that caused debt to pile up.

Here’s a closer look at the potential impact on your credit score when you consolidate debt through an individual loan or balance transfer credit card and other debt consolidation options.

Be aware of how your credit score is scored

See your free score and the variables that affect it, as well as insights into ways to build your score.

How debt consolidation can affect your credit score

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

With fewer bills to handle, it helps with budgeting. Cutting down on the interest rate can help you faster, because more of your money goes towards the debt rather than the interest.

Consolidating debt using personal loan

Pros:

Generally requires a lower credit score to be approved than a balance transfer card. (Not sure of where you stand? Check your with NerdWallet.)

This can improve your situation if you had only credit cards because it is an installment loan.

Can combine several payments into one, simplifying your finances.

through lowering the credit limit by transferring the balances of your credit card to an installment loan.

Cons:

It can lead to even more debt if you use up the newly available space in credit card.

If you end up overextended and unable to pay, missed payments will damage your credit.

You may pay high fees to borrow money if you don’t are aware of the APR.

The loan could come with an early payment penalty, locking you into a fixed time frame for payment.

>> MORE:

Consolidating debt with a balance transfer card

Pros:

It is possible to negotiate a lower interest rate (often for a predetermined period) and even a zero APR of 1% for credit-worthy consumers.

Flexible payments are easier than those with a loan.

No prepayment penalty.

Cons:

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

There could be interest due if you don’t pay off the loan before the initial rate expires.

Other alternatives for debt consolidation

If none of those options seem like the right fit you can consider other options. also can affect your credit.

It’s not the best idea to swap the debt that is unsecured (like credit card debt) with secured debt (like the mortgage or car loan) because you could lose your home or your vehicle if you can’t pay.

The loan is reported as the installment loan or revolving account, depending on which loan type you get. You’ll also get hit with an credit check.

Debt management plan: Seeing the services of a credit counselor and signing up for a does not directly impact your credit score. However, negotiating to pay less than the full amount due or closing credit cards may affect your score. A DMP is noted in your credit file when it’s in effect however it is not reflected after the plan has been completed.

The fact is that this information doesn’t appear on your credit report, so it has no effect on the credit rating. But you’re costing yourself investments and the impact increases with time. This is the best option as an option last resort.

The author’s bio: Bev O’Shea was a credit reporter at NerdWallet. Her work has been published in the New York Times, Washington Post, MarketWatch and elsewhere.

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