If you’re juggling multiple credit cards and other loans every month, debt consolidation could offer the relief you’re after. By rolling your high-interest debt into a single monthly payment with a lower rate, you can save money while getting out of debt faster. But if you’re hesitating due to a potential score impact, here’s a detailed explanation of how it can help your credit score in the long term.
Debt consolidation involves applying for a new debt consolidation loan or balance transfer credit card so that you can combine your debts into a single payment every month. While opening a new account for debt consolidation can temporarily lower your credit score, these negative effects should lift as you make on-time payments. Here’s a look at the negative vs. positive impacts.
| Negative impacts | Positive impacts |
|---|---|
| Hard inquiry. When you apply for new credit, a hard inquiry is run on your credit report, which can lower your credit score by up to 10 points for up to one year, although it might just be a few points. | Improved credit utilization. By consolidating debt and consistently paying it down, you can lower your credit utilization. |
| New account. Opening a new account, such as a balance transfer credit card or a personal loan, reduces the average age of all your accounts which can decrease your score. | Credit mix. If you use a personal loan for debt consolidation, it can improve your credit mix, which makes up 10% of your credit score. |
| Closing credit accounts. While closing a credit account after consolidating it, can increase your credit utilization ratio, it will decrease the average age of your accounts at the same time, which can drop your score. | Credit score increases. As long as you make on-time payments toward your debt consolidation loan and don’t take on new unsecured debt, your creditworthiness should improve over time. |
While there are no guarantees, according to Experian, you should see an improvement in your credit score as soon as one or two months after you pay off a debt. For example, if you pay off a credit card, you should see your credit score rise after 30 to 45 days, and for installment loans, you should see an increase after one or two months.
Debt consolidation involves combining multiple debts into a lower-interest personal loan or a 0% APR balance transfer credit card. When you apply for a new debt consolidation loan, you can often arrange to have the company pay your creditors directly in exchange for a discounted rate.
While opening a new account for debt consolidation can temporarily lower your credit score, these negative effects should lift as you make on-time payments. And, as your overall debt decreases, you should see your score improve significantly over time. Learn more about how debt consolidation works.
If you’re considering taking out a personal loan to consolidate debt, here are the main pros and cons to be aware of:
Explore some of the best debt consolidation loans for low interest rates and budget-friendly repayment options.
If you have good credit and can get a 0% introductory rate credit card, here are the main pros and cons to weigh:
Compare the best balance transfer cards for 0% intro APRs and generous promotional periods.
It depends. While it’s possible to qualify for a debt consolidation loan with bad credit, it may or may not be worth it. Currently, the average rate for personal loans for those with bad to fair credit is between 17.80% and 32.00% – which may not be much better than what you’re already paying on your credit cards. You’ll also likely be on the hook for an origination fee of 1% to 10%, which further adds to the cost of borrowing.
However, if you can get a lower rate by using a creditworthy cosigner or with a secured loan, it could be a good move. And debt consolidation may improve your credit score over time, as long as you keep up with your payments and don’t take on new credit.
But if you have poor credit and a high amount of debt, it’s a good idea to weigh the pros and cons first and consider alternative debt payoff strategies, like credit counseling, the debt avalanche or debt snowball methods — or even debt relief.
If you have good to excellent credit, debt consolidation can definitely be a smart idea, especially if you can snag a good rate. Right now, the average interest rate on personal loans for good credit borrowers is between 10.73% to 12.50%, much lower than the average credit card rate of 20.92%.
This means a good credit borrower could potentially shave 10% off their interest obligations with a competitively priced debt consolidation loan. Also, borrowers with good credit can generally qualify for 0% APR balance transfer credit cards. These can be even cheaper than a loan if you pay off your debt during the promotional period.
While your credit score may temporarily dip as you open a new account for debt consolidation, you should see this number improve as you pay off your unsecured debts entirely.
Because debt consolidation involves taking on more debt, here are seven strategies to help make it work for you:
If you don’t qualify for a debt consolidation loan or balance transfer card or would rather not take on more unsecured debt, consider these alternatives:
Debt consolidation can be a good option for those with good credit who can secure a low interest debt consolidation loan or 0% APR balance transfer credit card. But it may not work if you have bad credit, since you may not be able to get a competitive rate.
If poor credit and large debts are holding you back, you can also look into a debt relief program, but be aware these programs can impact your credit score much more than debt consolidation.
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