Does Debt Consolidation Hurt Your Credit?

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Key takeaways

Consolidating multiple debts can simplify payments and ultimately lead to an increase in your credit score.
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 pay off debt faster.

There are multiple ways to consolidate debt, including personal loans, 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 refinancing. Consolidation refers to combining multiple unsecured debts into a single payment. Credit card refinancing is specifically designed for outstanding credit card balances that are transferred to a balance transfer card. Either way, you will streamline payments and make paying dues more efficient.

Ways to consolidate debt

Apply for a debt consolidation 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.

Apply for a balance transfer card

Balance transfer cards allow you to transfer outstanding balances to a new card with a promotional low or 0% APR (annual percentage rate), which significantly reduces your minimum payments. The catch is that 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.

Dealing with payday loans?

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Consider a home equity loan or HELOC

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. When deciding between a HELOC vs. home equity loan, consider how you want to access your funds.

Can you consolidate debt into a first-time mortgage? Yes, you can, but you may need to make 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.

Borrow funds from your 401 (k)

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 repay it according to your account’s terms. 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.

Enroll in a 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.

Ready to be done with debt?

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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.

How consolidating debt may improve your credit	How consolidating debt may hurt your credit
You lower your credit utilization.	You will trigger a hard inquiry that lowers your credit score.
You simplify your payment schedule and make it easier to pay on time.	Opening a new account can reduce the length of your credit history.
You build a positive payment history.	Closing old credit cards can increase your credit utilization ratio.
You improve your credit mix.	Missing payments can hurt your score.
You reduce the risk of missing a payment.	You’ll increase your debts if you continue to use your credit cards.

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.

Ways debt consolidation can raise your credit score

Consolidating your debt can actually benefit your score. While it may have an initial negative impact, your score will benefit overall.

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Lowers your credit utilization

Why does a higher credit utilization decrease your credit score even if you always pay on time? It’s about how much you owe. Lenders find high balances risky because it indicates that you’re relying too much on credit.

When you use a debt consolidation loan to pay off outstanding credit card balances, you’ll end up with a lower utilization ratio. Using a smaller amount of credit will give a quick boost to your score.

Easier to pay on time

Managing multiple payments each month can be overwhelming. It’s simple to lose track of when a payment is due. Consolidating your debt into a single monthly payment makes it easier to stay organized and pay on time. Consistently making on-time payments is the best way to build credit.

Diversifies your credit mix

A debt consolidation loan adds an installment loan to your credit profile. If you primarily have revolving accounts, such as credit cards, this is beneficial. A more diverse credit mix can have a positive effect on your score. It demonstrates to lenders that you can handle various types of credit responsibly.

Debating between paying dues and saving cash?

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

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

One of the biggest benefits of consolidation is lowering your interest rate. According to LendingTree, the average APR for credit cards is 24.23%. Personal loans and home equity loans tend to have lower APRs. A lower interest rate can save you a significant amount of money over the life of the loan and help you repay your debts faster.

There are debt consolidation loans designed for people with poor 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.

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 determine if a service is legitimate is to verify its accreditation with the Better Business Bureau. Look at how long they’ve been in business and how they’ve handled complaints.

Pros and cons of consolidating debt

Pros:

Can lower your credit utilization
Makes it easier to make on-time payments
Potentially lowers your interest rate
Reduces the risk of missed payments
Can help build credit in the long run
May increase your credit mix
Helps you repay debts faster

Cons:

The hard inquiry can slightly lower your credit score
Closing old accounts can hurt your credit
Doesn’t solve underlying financial issues
May have to pay initial fees
Risk of accumulating new debt

Alternatives to a consolidation loan

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

Credit card hardship

Credit card hardship programs offer temporary relief to individuals experiencing 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 impact your score, but some issuers may add a note to your credit report, serving as a warning 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, as it can severely harm your score.

Want to reduce what you owe?

Check out how debt negotiation can help.

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 negatively impact your score.

Find out more on MoneyFor.

Bankruptcy

Bankruptcy can provide a way out of insurmountable debt. It is generally not advisable, as it remains on your credit report for up to 10 years and can severely damage your score. Read more about going bankrupt.

Frequently asked questions

1. Is consolidating debt a good idea?

Consolidating debt can be a good idea if you want to simplify payments and lower your interest rates. It can make managing your finances easier by combining multiple debts into one monthly payment. You may also build your credit. Before you consolidate debt, make sure that you can afford the new payments and that you will indeed save money. It doesn’t help if you’re simply moving debt around.

2. What is the best way to consolidate credit card 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.

3. 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.

4. How can I consolidate my debt with bad credit?

You can apply for a secured loan, work with a credit union, or enroll a debt management plan through a credit counseling agency. Some lenders also offer personal loans for bad credit, though interest rates may be higher. Compare your options and select the one that will help you save money and pay off debts efficiently.

5. 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.

6. Do debt consolidation loans hurt your credit score?

A debt consolidation loan will initially lower your score due to the hard inquiry during the application process. Your score will only drop by a few points and it is temporary. Make timely payments and your score will improve.

7. How to rebuild credit after debt 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. Gradually your credit score will climb back up.

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

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32. 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.

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38. Save When I Get Paid automatically transfers 10% of your direct deposits of $500 or more from your Checking Account into your savings account.

39. 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.

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43. Not affiliated with Empower Annuity Insurance Company of America (www.empower.com). Not everyone will qualify. Offers range from $10-$300 for first-time customers; $10-$400 for all others. Offers are based on our eligibility requirements and can go up with on-time payments. In Feb 2025, the average offer was $95 for first-time customers; $187 for all others. Instant delivery is optional—see fees in Empower’s Terms. Empower offers a 14-day trial for first-time customers followed by an auto-recurring $8/month subscription fee. Cancel anytime.

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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.

Does Debt Consolidation Hurt Your Credit?

Key takeaways

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How debt consolidation works