How Debt Consolidation Affects Your Credit Score
A LendingTree study found that borrowers who paid down at least $1,000 in credit card debt with a personal loan saw their credit scores rise by an average of 29 points after just one month. Consolidating higher balances can lead to an even bigger bump.
Still, debt consolidation is not a silver bullet. Your credit score could temporarily dip, and missed payments can cause further damage. It’s crucial to understand and compare all your options before moving forward.
- Debt consolidation can raise your credit score by more than 80 points if you’re paying down more than $25,000 of credit card debt, according to a LendingTree study.
- Your credit score may temporarily drop when a debt consolidation lender performs a hard inquiry on your credit report, or if you close old credit card accounts.
- Be careful not to build up new credit card balances after consolidating. Increasing your debt by continuing to use your credit cards can lower your credit score.
- Keep your old credit card accounts open, if possible. This will help minimize damage to your credit score.
How does debt consolidation affect your credit?
Few things are more overwhelming than debt. But for some borrowers, debt consolidation can provide much-needed relief by reducing credit card balances, streamlining monthly payments and improving credit scores.
However, the impact of debt consolidation isn’t the same for everyone. Factors like your credit score and the amount of debt you consolidate can influence how much your score changes.
Paying off larger debts may yield more dramatic results
During LendingTree’s study, borrowers who paid off at least $25,000 in credit card debt with a debt consolidation loan saw their credit scores increase by an average of 86 points after one month.
Meanwhile, those paying down less than $5,000 saw an improvement of 16 points.
Borrowers with lower credit scores may see more improvement
LendingTree’s study found those with scores below 580 who paid down at least $1,000 in credit card debt saw their scores increase by 45 points in the first month and 42 points in the first three. Those with super-prime scores saw smaller gains.
Borrowers with lower scores often have more room for improvement, so paying down credit card debt can have a bigger impact on their credit scores.
Ways debt consolidation can improve your credit score
- Improves your payment history. If you find a debt consolidation loan that lowers your monthly interest, it can be easier to pay your bills on time. Payment history accounts for 35% of your FICO Score, making it the most important credit scoring factor.
- Lowers the amount of credit you’re using. Paying off credit cards with a debt consolidation loan can eliminate high balances. This can improve your credit utilization ratio, which is worth 30% of your FICO Score.
- Adds a new type of credit. Adding a new type of credit (like a personal loan) when you’ve only used cards in the past could improve your credit mix. Credit mix makes up 10% of your FICO Score.
Ways debt consolidation can hurt your credit score
- Hard credit pull. When you apply for a loan, the lender will likely run a hard credit check. This will ding your credit score, but usually only by 5 points or fewer. This damage typically falls off in one year.
- Opening a new account. When you get a debt consolidation loan, you’re adding a new account to your credit history. This can lower the average age of your credit accounts. Length of credit history makes up 15% of your FICO Score.
- Closing old credit card accounts. If you close an old credit card after paying it off, the average age of your accounts could decrease, along with your available credit, potentially lowering your credit score.
- Frees up more credit, which could lead to more debt. If you overspend on your cards once you’ve paid them off, you’ll regrow your debt. This can hurt your score by increasing how much you owe and raises your risk of missing payments.
Depending on your financial situation, you can choose between a few debt consolidation options:
- Balance transfer cards allow you to shift credit card debt to a new card with a low or 0% introductory interest rate. Balance transfers generally come with fees but if you can pay off your debt during the intro period (often 12 to 15 months), this is typically the cheapest way to consolidate.
- Debt consolidation loans can help borrowers, including those with bad credit, lower their interest rates or monthly payments and pay off multiple debts at once.
- Home equity lines of credit and home equity loans can carry lower interest rates and longer repayment terms than unsecured loans, but borrowers who cannot pay on time risk losing their homes.
- 401(k) loans allow people to borrow from their retirement savings, often at a lower interest rate. Still, borrowers will forfeit the potential investment gains from those savings and risk early distribution penalties and tax liabilities if the loan is not repaid on time.
Debt consolidation and your credit score: what you can expect
| Timeline | What may happen |
|---|---|
| Applying | Hard inquiry may lower score slightly. |
| First month | New loan lowers average account age. |
| After paying off cards | Credit score may improve as credit utilization ratio decreases and credit mix (potentially) increases. |
| First 3 to 6 months |
|
| Long term |
|
Who is most likely to see a credit score benefit from debt consolidation?
Debt consolidation can be a helpful tool, but it’s not ideal for everyone. Depending on your financial situation, it may not alleviate the underlying problem.
You may be more likely to see a boost if…
- You can find a lower interest rate than what you’re currently paying.
- You can lower your monthly payments.
- The new borrowing terms will improve your ability to pay regularly and on time.
- You use your credit cards sparingly after consolidating.
Debt consolidation may do more harm than good if…
- You still can’t afford your debt after consolidating.
- You don’t qualify for a lower interest rate.
- High fees outweigh your projected savings.
- You use your home as collateral but aren’t certain that you can pay back what you borrowed.
- You continue to accumulate debt by overspending.
How much can you save by consolidating your debt?
Consumers with a credit score of 760 or higher can save up to $1,750 and pay off debt six months faster by consolidating $10,000 worth of credit card debt with a personal loan
But how much can you save? Tell us about your current debts and credit score. We’ll tell you how much money and time you can save by consolidating. If you aren’t sure what your credit score is, check it for free with the LendingTree app.
You can find all this information on your credit card statement or monthly loan statement for each debt you owe. These statements are also typically available in your online account with your credit card company or lender.
How to protect your credit score while consolidating debt
Keep making your original payments until the consolidation is complete
Some lenders will pay off your credit cards on your behalf. This can take some time. Don’t stop making regular minimum payments on your existing credit card and other debt balances until you are certain the debt consolidation process is complete.
Cut down on spending
Spending more on your cards after transferring your debt to a consolidation loan will only damage your credit score down the line if you’re unable to make payments. Consolidating debt is a great time to re-evaluate your spending habits so you don’t end up in over your head in the future.
Make a plan
Consider speaking with a nonprofit credit counselor to determine which consolidation options, if any, would make your debt more manageable. Even if you decide against consolidating, a credit counselor can help you create a monthly budget so you can keep up with your current payments.
Shop around for the best rates
Lower rates mean lower monthly payments, and affordable monthly payments can make the difference between missing payments and making them on time. On-time payments will keep your payment history — and credit score — strong.
Check out ways to improve your credit score, whether or not you decide to consolidate.
Frequently asked questions
Debt consolidation can decrease your credit score in the short term, but the losses are usually small. Meanwhile, ideal candidates who pay off credit card debt and maintain timely payments typically see credit score increases in the long term.
Credit card accounts typically remain open after debt consolidation. Closing a paid-off credit card could damage your FICO Score by shortening your credit history and reducing your available credit.
That said, it’s crucial to avoid spending more than what you can pay off in full on any accounts you keep open. Otherwise, you may end up in a worse situation than when you started.
You may not be able to consolidate without hurting your credit score. You should expect a small drop in the first month or two after taking out a debt consolidation loan. But over time, many borrowers see their credit scores increase as long as they make their payments on time.
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