Does Debt Consolidation Help Your Credit Score?

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Debt consolidation can help your credit depending on how you manage your loan repayment. But it can also hurt your credit score, at least initially. (Shutterstock)

Debt consolidation is the process of combining multiple balances owed into one account. You can do this through a credit card balance transfer, personal loan, or line of credit, making your debt more manageable and even saving you money by lowering interest costs.

But debt consolidation can also affect your credit rating. Here’s a look at how it can help your credit, how it can potentially hurt your credit, and some different ways to consolidate debt.

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How Debt Consolidation Can Help Your Credit Score

A debt consolidation loan can help you build or improve your credit score in a number of ways:

  • It can result in a faster payout. If you consolidate your debt into one account, you may be able to lower your interest rate or monthly payments. This could allow you to pay off more of your balance each month than if you were juggling multiple accounts, and get you out of debt sooner. And the sooner you reduce your balance, the better your credit rating will be.
  • It can reduce your credit utilization. Your credit utilization ratio tells you how much credit you are using compared to your available credit. For example, by moving your debt from an exhausted credit card to a new line of credit, you reduce your credit utilization on that account. Depending on how much of your credit limit was previously available, your score could increase.
  • It can improve your credit mix or payment history. If you only have credit cards on your credit report, adding a personal credit account to your credit mix could add to your credit mix, which can improve your score if you make payments on time.

How Debt Consolidation Can Affect Your Credit Score

There are many financial benefits to streamlining your debt. but Debt consolidation can also affect your credit score in several ways:

  • Hard credit deductions can lower your score. Lenders will be rigorous when reviewing your application for a new loan or credit-based product. This can temporarily lower your credit score by a few points. The more difficult requests you have in a short period of time, the more you can expect your score to drop.
  • New loans affect the average age of your accounts. Taking out a new loan or line of credit to consolidate your existing debt lowers the average age of your credit accounts, which can also cause your score to drop.
  • This may affect your total available balance. If you transfer multiple balances to a new type of balance – for example a prepaid card – and then cancel the cards you have paid out, the total balance available to you will decrease. This can have a negative impact on your credit utilization.

Fortunately, the effects of debt consolidation are generally short-term. By making your new loan payments on time and paying off your debt, any temporary change in your credit rating will usually correct itself within a few months.

What is your credit score?

Technically, you have many different credit scores depending on what scoring model a lender uses. The most commonly used grading model is FICO, provided by Fair Isaac Corporation.

FICO considers these factors when calculating your score:

  • Payment history (35%) — Your payment history is the most important factor that determines your creditworthiness. A history of on-time payments shows lenders that you are more likely to repay a loan.
  • Amount Owed (30%) — This is how much total credit you owe compared to your available credit.
  • Average Age of Accounts (15%) — This includes how long you’ve managed your accounts on a credit basis, how old your oldest account is, how old your newest account is, and how long it’s been since you’ve used certain accounts.
  • New Credit Lines (10%) — Lenders also consider accounts with short histories and recent requests for new loans.
  • Credit Mix (10%) — Your credit mix is ​​made up of the different types of credit-based accounts you have and manage, such as: B. Auto loans, credit cards, and student loans.

If you want to see what interest rates you might qualify for without hurting your credit score, visit Credible Compare personal loan rates from different lenders in minutes.

Here’s how to build your credit score after taking out a debt consolidation loan

if you take out a debt consolidation loanhere are some things you can do to improve your credit score:

  • Always pay on time. A debt consolidation loan can help you build a strong credit history, but only if you make your monthly payments on time and in full.
  • Create a budget. Your budget should account for your new loan payment and other monthly bills, and you can also use it to avoid overspending.
  • Avoid creating new credit card debt. Once you’ve paid off your credit card balances, it’s important to limit (or even avoid) additional credit card purchases, especially if your budget doesn’t allow you to pay the bill balance in full each month.

Personal Loan vs. Wire Transfer Credit Card: Which Should You Choose?

Taking out a personal loan and transferring funds to an existing credit card account are popular debt consolidation options. But what is the better choice?

The answer really depends on how much you owe, how much credit you have, and what interest rate you qualify for. For example, if you have multiple accounts and higher balances, taking out a $20,000 personal loan can be less expensive than transferring six different balances and paying credit card balance transfer fees each time.

Personal Loans


  • You pay back the loan in fixed monthly payments, which can make budgeting easier than juggling multiple credit card balances.
  • They usually have lower fees than credit cards.
  • They can make it easier to consolidate multiple debts and balances.


  • They may have higher credit requirements to qualify.
  • They don’t have 0% introductory interest.
  • They are not revolving credit products, so you will not be able to draw any more money from them in the future, even after your balance has been paid off. If you later need additional funds, you will need to apply for a new personal loan.

Credit card transfer


  • They usually offer an introductory 0% APR with no transfer fees for a period of time, potentially saving you a lot of money up front.
  • They may contain cards you already own and will help you avoid opening new accounts or making tough loan inquiries.


  • They often revert to double digit rates after the promotional period is over and can get very expensive if you don’t pay the balance in full by then.
  • They may incur charges for each balance you transfer to the card.

Other Debt Consolidation Options

You can use different financial products and debt consolidation approaches. Here are some of the most common:

  • home equity line of credit — HELOCs allow you to tap into the equity in your home. A HELOC secured by your home works much like a credit card. You have a set credit limit that you can draw on when you need it at an agreed interest rate.
  • Home Loan — A home equity loan is also guaranteed by the equity in your property and works like a personal loan. You get a lump sum that you pay back in monthly installments at a set interest rate.
  • payout refinancing — When you have built up enough equity in your home, a Refinance cash out you can withdraw part of this value in cash, which you can then use for whatever purpose you like (e.g. paying off debt). Withdrawal refinancing also allows you to lower your interest rate or adjust your monthly payment amount.
  • Retirement Account Loan — If your plan allows, you can use a 401(k) loan or other retirement account to consolidate debt — but that’s not usually a good option. Depending on the type of account and your age, penalties, interest and taxes may apply to the amount you withdraw. Also, withdrawing that money before retirement can affect your future financial security.

Why Taking Out a Debt Consolidation Loan Can Save You Money

When it comes to getting out of debt—whether it matters credit card balanceMedical bills or other credit accounts, taking out a personal loan for debt consolidation can be a good option.

A personal loan can allow you to cut high interest rates (especially when it comes to credit card balances), making it easier to pay off your debt at a lower overall cost. It also allows you to streamline your debt with one monthly payment in one account, which is easier to manage.

Finding the right personal loan is the first step to debt consolidation.

When you’re ready to apply for a personal loan to consolidate your high-interest debt, visit Credible quickly and easily Compare personal loan rates from different lenders in minutes.

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