Does Debt Consolidation Hurt Your Credit Score?

In the end, debt consolidation can help your score more than it’ll hurt it.

credit cards
Updated June 28, 2024
Here at MoneyFor, our goal is to help you make informed financial decisions. We are committed to accuracy and impartiality in all our content. It’s important to note that articles may reference products from our partners who compensate us. This influences which products we feature and their presentation on our site, not our evaluation.

Key takeaways

  • Consolidating multiple debts can make payments easier and ultimately cause your score to increase.
  • Personal loans are the most popular way to consolidate debt. Other options include balance transfer cards and borrowing from a retirement account.  
  • Alternative ways to reduce your debt load include debt settlement, budget overhaul, and bankruptcy.

Debt consolidation can be an extremely useful repayment strategy if you’re struggling to pay multiple loans or credit card balances. Consolidation can help you save money, streamline your payments, and simplify your finances. But what about credit scores? 

Let’s find out how to consolidate debt and what it does to your score.

How debt consolidation works 

Debt consolidation is when you roll multiple debts into one with a lower interest rate. Having only one monthly payment can make it easier to pay on time, save money, and get out of debt faster.

There are multiple ways to consolidate debt, from personal loans to borrowing from your 401(k) or using a balance transfer card. In the case of a loan, you will use the money to repay your creditors and then pay off the new loan. If you choose a balance transfer card, you will transfer your outstanding balances onto the card.

There’s not much difference between debt consolidation and credit card refinance. Consolidation refers to combining any unsecured debt into one payment. Credit card refinance is specific to outstanding credit card balances being moved to a balance transfer card. Either way, you will streamline payments and make paying dues more efficient.

Ready to be done with debt?

Check out how to get out of credit card debt!

Types of debt consolidation

Balance transfer credit card

Balance transfer cards let you move outstanding balances onto a new card with a promotional low or 0% APR (annual percentage rate), significantly reducing your minimum payments. The catch is if you don’t pay the balances in full before the promotional period ends, you may be subject to high interest rates on the full transferred amount. Also, you need an excellent score to qualify.

Personal loan

The most popular consolidation method is to use a personal loan. Personal loans tend to have lower APRs than cards, and some are specifically designed for consolidation. You can get a loan with a low score, but to secure the best interest rates, you need a good credit score.

Debt management plan

Debt management plans (DMPs) involve working with a nonprofit credit counselor. The counselor negotiates with creditors for lower interest rates or waived fees. You make one affordable monthly payment to the counselor who pays your creditors. It’s an easy way to simplify payments without taking out a loan.

Home equity loan or line of credit

A home equity loan or line of credit (HELOC) allows homeowners to borrow against the equity in their property. The loan provides a lump sum with fixed payments, while a HELOC offers a revolving line of credit with variable interest rates, allowing for ongoing access to funds. You will likely receive a lower interest rate than on a personal loan or balance transfer card. Can you consolidate debt into a first-time mortgage? Yes, you can, but you may have to put down a larger down payment. No matter if it’s a first-time mortgage, HELOC, or home equity loan, you put your home at risk if you fail to repay.

401 (k) loan

A 401(k) loan allows you to borrow money from your retirement account, up to 50% or $50,000, whichever is less. Be careful to pay it back according to your account’s rules. While it won’t affect your score, you may face taxes or penalties. It also reduces your retirement savings and you lose out on accruing interest on the withdrawn amount.

Want to reduce what you owe?

Check out how debt negotiation can help.

How much does debt consolidation hurt your credit score?

It’s a misconception that consolidation always hurts your credit score. It depends on how you handle the new credit account.

Boost credit score

Initially, your score will drop by about 10 points due to lenders’ hard inquiries. Opening a new account will also decrease the average age of your credit accounts, but this impact is minor and diminishes over time.

On the positive side, consolidating outstanding balances into one manageable payment increases the likelihood of making timely payments. Paying on time is the best thing you can do to improve your credit score. As you pay down your debt, you will increase your utilization ratio, another major scoring factor.  

Do personal loans hurt your credit more than other types of debt? No, it all depends on how you repay the loan. Debt consolidation loans or balance transfer cards can equally help you establish a positive credit history and improve your score.

Tips to minimize the negative effects on your credit

Once you’ve decided to consolidate, it’s important to have a game plan to minimize the impact on your score. Don’t go claiming I ruined my credit.

Compare loan terms

Before committing, compare the terms offered by different lenders. Look at interest rates, fees, repayment periods, and amounts. Choose a loan with a low interest rate and lower overall cost than your current debt. If you’re not careful, you could end up paying more.

Pay on time

Pay on time every month. Timely payments are the biggest factor in calculating your score. By consistently paying on time, you demonstrate financial responsibility, which can gradually improve your score.

Pros and cons of consolidating debt

Pros: 

Lower credit utilization: Consolidating outstanding balances into one can potentially lower your utilization rate.

Simplified payments: Having only one monthly payment can help avoid late or missed payments, improving your score.

Pay less interest: You can significantly reduce your interest rate making paying off dues easier and saving money.

Faster repayment: Paying less interest means more money goes toward the principal enabling you to pay off the balance faster.

Fixed repayment schedule: Loans have a set repayment schedule. You know exactly what is due each month and when the last payment will be.

Improve your credit: Consistent on-time payments and lower utilization can positively affect your score.

Special offers: Consolidation loans may offer direct payment to creditors, free score monitoring, hardship flexibility, or additional discounts.

Cons: 

Hard inquiries: Lenders will conduct a hard pull causing your score to dip.

New account: Adding a new account will lower the average age of your credit and reduce your score. 

Increased credit utilization: If you pay off a card with your new loan and then close it, your cumulative limit decreases and your score will lower.

Fees: A consolidation loan or balance transfer card may charge fees. Make sure the fees don’t negate any potential savings.

Won’t solve financial problems: Consolidation does not fix the underlying problems that led to debt.

Read more about debt consolidation!

When it makes sense to consolidate your debt

Consolidating your outstanding balances makes sense if you:

  • Have high interest payments
  • Want to simplify your finances
  • Can get a lower APR
  • Prefer fixed monthly payments
  • Want one payment per month
  • Can afford the loan
  • Have a stable income

For consolidation to work, you must commit to making on time payments. This means having a disciplined budget and not borrowing anything else during the repayment period.

You also need to verify that the new lender has a good reputation. One way to find out if consolidated credit is legit is to check their accreditation with the Better Business Bureau.

You could receive a lower interest rate

outstanding debt

Credit cards have an average APR of 20% to 29.99%. Personal loans have an average APR of 10% to 12% and home equity loans an average APR of 8.63%. A lower APR can save you a significant amount of money over the life of the loan and help you repay your dues faster.

There are debt consolidation loans designed for people with bad credit. The best consolidation loans for bad credit come with a low interest rate and few fees. True, the borrowers with the higher scores get better rates, but you can still save on interest. 

Debating between paying dues and saving cash?

Find out if you should pay off debts or save money!

Alternatives to a consolidation loan

Debt consolidation vs. debt relief, which should you choose? There are plenty of debt relief strategies. The right one depends on your circumstances.

Credit card hardship

Credit card hardship programs provide temporary relief to those struggling with financial difficulties. Features may include adjusting the payment due date, waiving late fees, reducing the interest rate, or lowering the minimum payment. Does credit card hardship hurt your credit? The program does not directly affect your score, but some issuers may put a note on your credit report, serving as a red flag to lenders.

Debt settlement

Debt settlement involves negotiating with creditors to pay a lump sum less than the amount owed. It’s a strategy often used as a last resort since it can severely hurt your score.

Budget overhaul

Cut all unnecessary expenses and put any extra funds towards paying outstanding balances. It requires discipline and may involve lifestyle changes, but it will not have a negative impact on your score.

Find out more on MoneyFor.

Bankruptcy

Bankruptcy can provide a way out of insurmountable debt. It is generally not advised since it stays on reports for up to 10 years and can severely hurt your score. Read more about going bankrupt.

Frequently asked questions

1. How long does it take for credit scores to recover after debt consolidation?

Scores will begin to recover within a few months, provided you make consistent, on-time payments. The exact timeline varies based on your credit history and consolidation plan.

2. Is consolidating debt with a balance transfer good?

A balance transfer card can be a smart move for those with high-interest payments. You can save money but beware of fees and be sure to pay off the balance before the promotional period ends.

3. What is the best way to consolidate debt?

Personal loans are the easiest to get with a lower interest rate. A balance transfer card is another good method if you qualify for a low APR and can repay the total transferred balance before the promotional period ends.

4. How to get a debt consolidation loan?

Check your score and prequalify to compare loans. Then, apply with the lender who offers the best terms.

5. Do you have to close your credit cards when consolidating debt?

No, you don’t have to close your cards but you do need to stop using them and accumulating more debt.

6. How long does a consolidation loan stay on your credit report?

A consolidation loan stays on your report for the duration of the loan term plus up to ten years after it is paid off.

7. Does student loan consolidation hurt your credit?

Student loan consolidation has the same effect on your score as other loans. Make timely payments on the new loan and your score will go up.

8. How much debt is too much for a consolidation loan?

The amount varies based on your income, score, and the lender’s criteria. If your debt-to-income ratio exceeds 40-50%, you may have difficulty qualifying for a consolidation loan.

9. Does a debt consolidation loan hurt your credit score?

Like any loan, it may initially lower your score due to the hard inquiry during the application process. Make timely payments and your score will improve.

10. How can I build credit after consolidation?

Make consistent on-time payments on all loans and credit cards. Keep your balances below 30% of your limit. Avoid opening new credit accounts, and monitor your score.

11. Is consolidation the same as debt forgiveness?

No, consolidation involves combining multiple debts into one, which you then repay. Debt forgiveness is when a portion or all of what you owe is canceled, meaning you no longer have to pay.

12. Does debt consolidation affect buying a home?

Debt consolidation does not affect buying a home, but your credit score and debt-to-income ratio do. As you make timely payments on your loan or balance transfer card, your score and debt-to-income ratio will improve, making it easier to secure a mortgage with favorable terms.

13. Does National Debt Relief hurt your credit?

National Debt Relief is a debt settlement company that negotiates with creditors to accept a reduced lump-sum payment. It requires you to stop making payments as part of the process which will hurt your score.

14. Does debt consolidation affect buying a car?

Consolidation itself does not affect buying a car. It can improve your score and lower your debt-to-income ratio, making it easier to qualify for an auto loan.

Bottom line

Debt consolidation offers a solution for those overwhelmed by high interest debt. It can lower interest rates, simplify payments, and even increase scores. 

Before you choose consolidation, make sure you can make payments on time and that you’ll save money. Doing so will help you repay debts faster and improve your credit history at the same time.

1. Paycheck Advance is For eligible customers only. Your actual available Paycheck Advance amount will be displayed to you in the mobile app and may change from time to time. Conditions and eligibility may vary and are subject to change at any time, at the sole discretion of Finco Advance LLC, which offers this optional feature. Finco Advance LLC is a financial technology company, not a bank. Expedited disbursement of your Paycheck Advance is an optional feature that is subject to an Instant Access Fee and may not be available to all users. Expedited disbursements may take up to an hour. For more information, please refer to Paycheck Advance Terms and Conditions.
2. Current is a financial technology company, not a bank. Banking services provided by Choice Financial Group, Member FDIC, and Cross River Bank, Member FDIC. The Current Visa® Debit Card is issued by Choice Financial Group pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted. The Current Visa® secured charge card is issued by Cross River Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa credit cards are accepted. Please see the back of your Card for its issuing bank. Current Individual Account required to apply for the Current Visa® secured charge card. Independent approval required.
3. Individual results may vary. Using your credit card responsibly may allow you to improve your credit score. Credit building depends on various factors, including your payment history, credit utilization, length of credit history, and other financial activities.
4. Faster access to funds is based on comparison of traditional banking policies and deposit of paper checks from employers and government agencies versus deposits made electronically. Direct deposit and earlier availability of funds is subject to timing of payer’s submission of deposits.
5. Current is a financial technology company, not a bank. Banking services provided by Choice Financial Group. Funds held in Savings Pods are FDIC-insured on a pass-through basis up to $250,000 at our partner bank Choice Financial Group, member FDIC
6. Actual overdraft amount may vary and is subject to change at any time, at Current’s sole discretion. In order to qualify and enroll in the Fee-Free Overdraft feature, you must receive $500 or more in Qualifying Deposits into your Current Account over the preceding 30-day period. For more information, please refer to Fee-free Overdraft Terms and Conditions.
7. You may earn Points in connection with your everyday spending and by completing other actions that Current designates as subject to the Current Points Program. The amount of Points granted for different actions as well as the purchase requirements necessary to earn Points will vary, and is subject to Current’s sole discretion. After qualifying, please allow 3-5 business days for points to post to your Current account. The Current Points program is not available to Teen Account holders. See Current Points Terms and Conditions.
8. Some fees may apply, including out of network ATM fees of $2.50 per transaction, late payment fees of 3% of any total due balance outstanding and past due for two or more billing cycles, foreign transaction fees of 3% of the full transaction amount (minimum $0.50), card replacement fees per card of $5 for regular delivery and $30 for expedited delivery, cash deposit fees of $3.50 per deposit, and third party processing fees.
9. Boost Bonuses are credited to your Savings Pods within 48 hours of enabling the Boost feature and on a daily basis thereafter, provided that the Savings Pod has accrued a Boost Bonus of at least $0.01. The Boost rate on Savings Pods is variable and may change at any time. The disclosed rate is effective as of August 1, 2023. Must have $0.01 in Savings Pods to earn a Boost rate of either 0.25% or 4.00% annually on the portion of balances up to $2000 per Savings Pod, up to $6000 total. The remaining balance earns 0.00%. A qualifying direct deposit of $200 or more is required for 4.00%. No minimum balance required. For more information, please refer to Current Boost Terms and Conditions.
10. Cryptocurrency services are powered by Zero Hash LLC and Zero Hash Liquidity Services LLC, and may not be available in all states. Terms and conditions apply. When you buy or sell cryptocurrency, a difference between the current market price and the price you buy or sell that asset for is called a spread. However, unlike most other exchanges Current does not charge an additional trading fee. Cryptocurrency transactions are a form of investment, and all investments are subject to investment risks, including possible loss of the principal amount invested. Cryptocurrency is not insured by the FDIC or any other government-backed or third-party insurance. Your purchase of cryptocurrency is not a deposit or other obligation of, or guaranteed by, Choice Financial Group or Cross River Bank. The cryptocurrency assets in your Zero Hash account are not held at Current, Choice Financial Group, or Cross River Bank. Current, Choice Financial Group, and Cross River Bank are not responsible for the cryptocurrency assets held in any Zero Hash account. Neither Current, Choice, nor Cross River Bank is involved in the purchase, sale, exchange of fiat funds for cryptocurrency, or custody of the cryptocurrencies. Terms and Conditions apply (platform and user agreements). Crypto on Current is not currently available in HI. Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services. This does not constitute investment advice.
11. Current is a financial technology company, not a bank. Banking services provided by Choice Financial Group. Your money is FDIC-insured on a pass-through basis up to $250,000 at each of our partner banks, Choice Financial Group and Cross River Bank, members FDIC.
12. Average value based on Fine Hotels + Resorts bookings in 2023 for stays of two nights. Benefits include daily breakfast for two, room upgrade upon arrival when available, $100 amenity, guaranteed 4PM late checkout, and noon check-in when available. Certain room categories not eligible for upgrade. $100 amenity varies by property. Actual value will vary based on property, room rate, upgrade availability, and use of benefits.
13. Up to $500 per Covered Trip that is delayed for more than 6 hours; and 2 claims per Eligible Card per 12 consecutive month period. Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by New Hampshire Insurance Company, an AIG Company.
14. The maximum benefit amount for Trip Cancellation and Interruption Insurance is $10,000 per Covered Trip and $20,000 per Eligible Card per 12 consecutive month period. Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by New Hampshire Insurance Company, an AIG Company.
15. Baggage Insurance Plan coverage can be in effect for Covered Persons for eligible lost, damaged, or stolen Baggage during their travel on a Common Carrier Vehicle (e.g. plane, train, ship, or bus) when the Entire Fare for a ticket for the trip (one- way or round-trip) is charged to an Eligible Card. Coverage can be provided for up to $2,000 for checked Baggage and up to a combined maximum of $3,000 for checked and carry-on baggage, in excess of coverage provided by the Common Carrier. The coverage is also subject to a $3,000 aggregate limit per Covered Trip. For New York State residents, there is a $2,000 per bag/suitcase limit for each Covered Person with a $10,000 aggregate maximum for all Covered Persons per Covered Trip. Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by AMEX Assurance Company.
16. Car Rental Loss and Damage Insurance can provide coverage up to $75,000 for theft of or damage to most rental vehicles when you use your eligible Card to reserve and pay for the entire eligible vehicle rental and decline the collision damage waiver or similar option offered by the Commercial Car Rental Company. This product provides secondary coverage and does not include liability coverage. Not all vehicle types or rentals are covered. Geographic restrictions apply. Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by AMEX Assurance Company. Car Rental Loss or Damage Coverage is offered through American Express Travel Related Services Company, Inc.
17. Coverage for a Stolen or damaged Eligible Cellular Wireless Telephone is subject to the terms, conditions, exclusions, and limits of liability of this benefit. The maximum liability is $800, per claim, per Eligible Card Account. Each claim is subject to a $50 deductible. Coverage is limited to two (2) claims per Eligible Card Account per 12 month period. Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by New Hampshire Insurance Company, an AIG Company.
18. When an American Express® Card Member charges a Covered Purchase to an Eligible Card, Extended Warranty§ can provide up to one extra year added to the Original Manufacturer’s Warranty. Applies to warranties of five (5) years or less. Coverage is up to the actual amount charged to your Card for the item up to a maximum of $10,000; not to exceed $50,000 per Card Member account per calendar year. Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by AMEX Assurance Company.
19. Purchase Protection is an embedded benefit of your Card Membership and requires no enrollment. It can help protect Covered Purchases made on your Eligible Card when they’re accidentally damaged, stolen, or lost, for up to 90 days from the Covered Purchase date. The coverage is limited to up to $10,000 per occurrence, up to $50,000 per Card Member account per calendar year. Coverage Limits Apply. Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by AMEX Assurance Company.
20. Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
21. The secured Chime Credit Builder Visa® Card is issued by Stride Bank, N.A., Member FDIC, pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa credit cards are accepted.
22. Banking services and debit card provided by The Bancorp Bank N.A. or Stride Bank, N.A., Members FDIC, pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted.
23. The Annual Percentage Yield (“APY”) for the Chime Savings Account is variable and may change at any time. The disclosed APY is effective as of September 20, 2023. No minimum balance required. Must have $0.01 in savings to earn interest.
24. There’s no fee for the Chime Savings Account. Cash withdrawal and Third-party fees may apply to Chime Checking Accounts. You must have a Chime Checking Account to open a Chime Savings Account.
25. To apply for Credit Builder, you must have received a single qualifying direct deposit of $200 or more to your Chime Checking Account. The qualifying direct deposit must be from your employer, payroll provider, gig economy payer, or benefits payer by Automated Clearing House (ACH) deposit OR Original Credit Transaction (OCT). Bank ACH transfers, Pay Anyone transfers, verification or trial deposits from financial institutions, peer to peer transfers from services such as PayPal, Cash App, or Venmo, mobile check deposits, cash loads or deposits, one-time direct deposits, such as tax refunds and other similar transactions, and any deposit to which Chime deems to not be a qualifying direct deposit are not qualifying direct deposits.
26. Money added to Credit Builder will be held in a secured account as collateral for your Credit Builder Visa card, which means you can spend up to this amount on your card. This is money you can use to pay off your charges at the end of every month.
27. Based on a representative study conducted by Experian®, members who made their first purchase with Credit Builder between June 2020 and October 2020 observed an average FICO® Score 8 increase of 30 points after approximately 8 months. On-time payment history can have a positive impact on your credit score. Late payment may negatively impact your credit score.
28. On-time payment history may have a positive impact on your credit score. Late payment may negatively impact your credit score. Chime will report your activities to Transunion®, Experian®, and Equifax®. Impact on your credit may vary, as Credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations.
29. Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.
30. SpotMe® on Debit is an optional, no fee overdraft service attached to your Chime Checking Account. To qualify for the SpotMe on Debit service, you must receive $200 or more in qualifying direct deposits to your Chime Checking Account each month and have activated your Visa debit card. Qualifying members will be allowed to overdraw their Chime Checking Account for up to $20 on debit card purchases and cash withdrawals initially but may later be eligible for a higher limit of up to $200 or more based on Chime Account history, direct deposit frequency and amount, spending activity and other risk-based factors. The SpotMe on Debit limit will be displayed within the Chime mobile app and is subject to change at any time, at Chime’s sole discretion. Although Chime does not charge any overdraft fees for SpotMe on Debit, there may be out-of-network or third-party fees associated with ATM transactions. SpotMe on Debit will not cover any non-debit card transactions, including ACH transfers, Pay Anyone transfers, or Chime Checkbook transactions. SpotMe on Debit Terms and Conditions.
31. Tipping or not tipping has no impact on your eligibility for SpotMe®.
32. Out-of-network ATM withdrawal fees may apply except at MoneyPass ATMs in a 7-Eleven, or any Allpoint or Visa Plus Alliance ATM.
33. Save When I Get Paid automatically transfers 10% of your direct deposits of $500 or more from your Checking Account into your savings account.
34. Round Ups automatically round up debit card purchases to the nearest dollar and transfer the round up from your Chime Checking Account to your savings account.
35. Mobile Check Deposit eligibility is determined by Chime in its sole discretion and may be granted based on various factors including, but not limited to, a member’s direct deposit enrollment status.
36. Funds are automatically debited from your Checking Account and typically deposited into the recipient’s Checking Account within seconds. Pay Anyone transactions will be monitored and may be held, delayed or blocked if the transfer could result in fraud or another form of financial harm. Sometimes instant transfers can be delayed.
37. Pay Anyone transactions will be monitored and may be held, delayed or blocked if the transfer could result in fraud or another form of financial harm. Sometimes instant transfers can be delayed. Non-Chime members must use a valid debit card to claim funds.
* EarnIn is not available for Connecticut residents

About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.