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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.

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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.

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.

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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


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.


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.

Learn more about debt!

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. 

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.

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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

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.

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.

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.

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

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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.