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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 debt management plans and balance transfer cards.  
  • 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. You combine all you owe into a new loan with a lower interest rate and only one monthly payment. Consolidation can help you save money, streamline your payments, and simplify your finances. But what about credit scores? 

It’s a myth that debt consolidation always negatively affects credit ratings; in many cases, it can actually help.

How much does debt consolidation hurt your credit score?

It’s a misconception that consolidating your debt always hurts your score; the impact varies depending on how you handle the new loan. Generally, scores decrease in the short term and improve as you make on time payments.

Initially, your score will drop. Whenever you apply for a new loan or line of credit, the issuer will conduct a hard inquiry. This will lower your score by about 10 points and should last a few months to one year. To combat this, submit multiple loan applications within one month. The credit bureaus will treat multiple inquiries made within 14-45 days as one inquiry

Additionally, opening a new account decreases the average age of your credit accounts. The average amount of time you’ve had accounts makes up 15% of your score. A lower average age, a lower score. This is a small contributor and it will grow with time.

Boost credit score

On the positive side, if you only had cards and now have a personal loan you are increasing your credit mix, which makes up 10% of your score. Lenders like to see that you can handle different types of credit.

Consolidating your debts can also lower your credit utilization ratio, a key factor making up 30% of your score. Your credit utilization ratio is how much of your available credit you’re using. When you move multiple balances into a single account with a higher limit, you lower your utilization improving your score.

The most significant benefit comes from an improved payment history. By consolidating the money you owe into one manageable payment, you’re more likely to make timely payments. Consistent, on-time payments make up 35% of your score.

It’s a common concern that debt consolidation affects your credit rating negatively. Luckily, the initial negative impact is short-lived. In the long run, consolidation can raise scores.

Types of debt consolidation

Debt Management Plan

Debt Management Plans (DMP) involve working with a nonprofit credit counselor to pay off your debt through a single monthly payment. The counselor negotiates with creditors to reduce your monthly payments by lowering interest rates or waiving fees. Your score is not an eligibility factor. The plan will be noted on your credit report but will come off as soon as it’s complete. It’s an easy way to simplify payments without taking out a loan.

Balance Transfer Credit Card

Balance transfer cards let you move outstanding balances onto a new card with a promotional low or 0% interest 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 interest rates and better terms than credit cards. You borrow a lump sum and use it to pay off all outstanding balances saving money. You’re left with one lower monthly payment and a clear timeline for repayment. You can get a loan with low score but to secure the best interest rates you need a good credit score.

Pros and Cons

A debt consolidation loan can be a smart way to handle overwhelming debt, but like any financial strategy, it comes with its own set of advantages and challenges.


Lower credit utilization: If you consolidate multiple card balances into one loan you can potentially lower your credit utilization rate.

Simplified Payments: Consolidating multiple monthly payments into one can help you avoid missed payments. Late payments or missed payments significantly hurt your score.

Pay Less Interest: Credit cards have an average APR of 20% to 29.99% while personal loans’ average APR is 10% to 12%.

Faster Repayment: If you’re paying less interest each month you can put more money towards the principal and pay is all off faster.

Fixed Repayment Schedule: Personal 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 credit utilization can positively affect your score.

Special Offers: Some consolidation loans come with special offers like 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 credit rating. 

Increased Credit Utilization: If you pay off a card with your new loan and then close it, your available credit decreases and your score will lower.

Fees: A consolidation loan or balance transfer card may come with fees that add up. Make sure the fees don’t negate any potential savings.

Won’t Solve Financial Problems: Consolidation can help you pay less and be debt-free faster, but it does not fix any underlying problems.

Learn more about debt!

When it makes sense to consolidate your debt

Consolidating your debt 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 debt consolidation to work you must be able to commit to repaying the loan. This means having a disciplined budget and not borrowing anything else during the repayment period.

You could receive a lower interest rate

outstanding debt

One of the primary reasons to take out a debt consolidation loan is to pay less interest. There are debt consolidation loans designed for people with bad credit – anything below 629. True, the borrowers with the higher scores get the better rates, but you can still save on interest. 

Consider Sarah, who had $10,000 in credit card debt spread across three cards with interest rates ranging from 18% to 24%. She consolidated these balances into a single loan with an APR of 12%, reducing her monthly payments and the total interest costs. Sarah used to pay $2,400 in interest per year. She now pays only $1,200, cutting her interest expenses in half.

Debt consolidation can effectively lower your interest rate so you save money and repay your dues faster.

Have a low score but need a personal loan?

Learn how you can prequalify and get the cash you need.

Alternatives to a consolidate loan

Consolidation is just one of many strategies. If you’re concerned about how debt consolidation might affect your score, consider these alternatives. 

Borrow from Your Retirement Account

If you have a retirement account like a 401(k), you can borrow from it. Be careful to pay the loan back according to your account’s rules. While it won’t affect your score you may face taxes or penalties.

Debt Settlement

Debt settlement involves negotiating with creditors to make a lump sum payment that less than the amount owed. It’s a strategy used often as a last resort when you have over $10,000 in debt, as it shows on your credit report that it was settled for a reduced amount, which can be a red flag to future lenders.

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 if you have insurmountable debt and no other options. It is generally considered a last resort since it stays on reports for up to 10 years and can severely impact your score, making it difficult to take out a loan or get a credit card.

Frequently Asked Questions

After consolidation, scores will begin to recover within a few months, provided you make consistent, on-time payments. Typically, you’ll notice improvements within six months to a year as you repay what you owe and maintain a good payment history. The exact timeline varies based on your credit history and consolidation plan, but responsible behavior will help your score improve.

Consolidation with a balance transfer card can be a smart move for those with high-interest payments. By transferring multiple balances to a card with a lower APR you can save on interest and potentially pay balances faster. However, it’s crucial to read the fine print for any transfer fees and ensure you can pay off the balance before the promotional period ends.

Whether it’s best to choose a loan or credit card for consolidation varies by individual circumstances. Most people opt for a personal loan as it’s easier to get a lower interest rate. Choosing a method that offers manageable payments and a clear repayment timeline can lead to significant savings on interest and help you repay balances faster. It’s essential to consider the full cost of the loan, card, or payment plan, and your financial stability when deciding if consolidation is for you.

Start by checking your score so you know what loans you’re eligible for. Shop around to compare interest rates and terms from various lenders, including banks, credit unions, and online platforms. Try to prequalify so you know your chances before you apply. Then apply with the lender that offers the best terms for your situation. Be prepared to provide documents, such as proof of income, your Social Security number, and proof of identity.

Bottom Line

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

Before you choose consolidation, it’s important to make sure that you will be able to make payments and that it’ll save you money.

Consider your options, make an informed decision, and stick with your plan. Then you’ll be able to pay off what you owe and live debt-free. 

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.