Does Debt Consolidation Hurt Your Credit Score?

When you’re ready to get out of debt, sometimes it’s hard to know which path you should take. For some people, debt consolidation will be the best option because it can allow you to group all your debt together, thereby making it easier to manage your debt – and in some cases lowering your monthly payment and interest rate at the same time (see our article on how debt consolidation works).

Does debt consolidation hurt your creditBut of course, before you can decide if it’s the right choice you have to answer some important questions. One of the most important is, “does debt consolidation hurt your credit score?”

To answer that, you need to understand how credit reports and credit scores work. If you’re not familiar with the process, here’s a very brief explanation: Your credit report contains information about all the credit accounts you’ve ever had, including mortgages, auto loans, credit cards, student loans, etc. Also included in your report is a history of the payments you’ve made on time, and those you have paid late (or not paid).

The 3 major credit bureaus (Equifax, Experian, and TransUnion) compile this information and make it available, along with your credit score, to lenders who want to find out how creditworthy you are. In theory, debt consolidation should not have a major impact on your credit score. However, the fact is, debt consolidation can improve or hurt your credit score. It depends on your particular situation and your ability to pay off debt.

Here are the questions you must answer in order to figure out if debt consolidation will hurt or help your credit in the long run:

1. What Type of Debt Consolidation Will You Do?

There are three main ways of doing debt consolidation:

  • credit card balance transfer
  • home equity loan (or Home Equity Line of Credit)
  • standard debt consolidation loan from a bank or debt relief company

Each of these three methods requires a hard inquiry on your credit, which is the same as when you apply for a new credit card, submit a rental application, or get an auto loan. The hard inquiry will lower your credit score by a few points and stays on your credit report for two years. However, this small hit to your credit is not necessarily a reason not to do debt consolidation.

2. How Will Debt Consolidation Affect Your Credit Utilization?

A bigger concern than the hard credit inquiry is how the debt consolidation might affect your credit utilization. The phrase “credit utilization” simply means the percentage of your available credit that you are currently using. If you have 3 credit cards, each with a credit limit of $5,000, and you have $1,000 of debt on each card, then your total credit limit is $15,000 and your total debt is $3,000 – which means that your credit utilization is 20%.

So how do the different types of debt consolidation affect your credit utilization?

If you make use of a balance transfer offer and move all your balances to a new credit card, you will immediately increase your total credit limit. Using the example above, let’s say you transferred your three credit card balances onto a new card. Now you have $3,000 on your new card, and it has a credit limit of $5,000. You also still have your old cards (with a total credit limit of $15,000), so your total credit limit is now $20,000 and your credit utilization is 15%. In this scenario, your credit score will likely improve!

But wait, what if you decide to close those 3 old credit cards? Then your total credit limit would only be $5,000 and your credit utilization would be 60% – which is well above the recommended threshold and would certainly hurt your credit score!

The same kind of calculation is true if you get a home equity loan or a standard debt consolidation loan: your credit score will likely improve if you keep your old credit cards open, but it will get hurt if you close them. Of course the problem is that there is an inherent temptation in leaving those cards open. Which brings us to the next question…

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3. Will Debt Consolidation Make You Spend More… or Less?

How well do you know yourself? Can you predict whether you’ll be tempted to spend more money if you suddenly have more credit available? As explained above, doing debt consolidation can hurt your credit if you close your old accounts afterward. But you can’t leave them open if you’re going to start spending on them again – after all, that defeats the whole purpose of using debt consolidation to destroy your debt, right?

This is why it’s important to know yourself and be realistic about your future behavior. If you know for sure that you won’t be tempted by leaving those old accounts open, then you can feel comfortable doing debt consolidation and knowing it will not hurt your credit, aside from the relatively minor impact of the hard inquiry.

However, if you think you might be tempted to continue racking up credit card purchases after doing debt consolidation, then you have to make a harder decision. If you can find a debt consolidation loan that will help you pay off your debt through lower interest rates or lower monthly payments then you should probably do it – and close your old credit cards despite the potential negative impact on your credit score.

After all, paying off your debt will help improve your credit score in the long run and save you plenty of money in interest and fees!


Hopefully the information above is helpful not only in answering the question “does debt consolidation hurt your credit score?” but also in giving you tools to decide what the best course of action is in your particular situation.

Remember, when considering whether to do debt consolidation, compare how these factors would be affected by the loan:

  • Your expected time to being debt free
  • Your long term interest rate
  • Your monthly payments
  • Your credit utilization rate

If you have any questions about the information above and how it might relate to your own individual situation, please post a comment below and we’ll do our best to answer it. And for further reading, check out our article, “Is Debt Consolidation a Good Idea?

This article is part of our Debt Consolidation Resource Center.  If you’re looking for additional information about debt consolidation, be sure to pay a visit!

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  • jay g

    HI, I have a follow up question to the above really great explanation. We can consolidate and not run the cards up again. But how soon can my husband get his credit rating up from a high-fair to good. I am also at around 711, so I don’t want mine to go down either. This need for the good credit ratings soon is for college funds coming up. We will either redoing our HELOC or get college loans.

    • Hi there, the truth is it really depends on the individual situation. I wouldn’t be able to say for sure, but the good news is we’ve heard many cases of people improving their score significantly in six months or so. Best of luck to you!

  • Goody

    I had to use my credit cards for medical after a car accident. Some things did not get filed correctly. I still had to use them for unexpected copays. The settlement did not pay me enough because it was not my fault, but the statute of limitations was about to be over. I had to move to an independent living facility, hoping that I would come out better financially but the moving costs were greater than expected. I need some advice. I asked for $15000 pain and suffering but after the doctors and lawyers got what was owed I was left with. Credit Card bills. I was told to put the copays and expenses occurring because I could not do my usual activities on my credit cards. I had just had eye surgery on both eyes which I had budgeted what insurance would not pay. Then the accident occurred. I am retired on Social Security and Teacher Retirement. I have been a widow for 18 years. I want to relieve stress from this debt and I still have hope to get gainful employment. I can stay on a budget. I pay my bills. I have one past due bill by oversight due to slow mail delivery during the holidays. Please advise.

    • Hi there, I’m sorry to hear about what you’ve had to go through. It sounds like a really hard thing to experience. In terms of the credit card debt, it seems like it mostly resulted from the medical costs. If you think you will be able to make payments, you could ask the lender for a modified payment plan (sometimes called a “hardship” plan). On the other hand, if you don’t think you’ll be able to pay it, then you might want to meet with a bankruptcy lawyer (they do free consultations) or a financial adviser to assess all your options. Best of luck to you!

  • josie

    I never done my house finance and now I will be doing my house finance and i find out that we are 80,000 in debt, we never late on payment we have a very good score. what you think I should start we have this amount in in about 5 credit cards help help!!!

  • James Gehring

    Hi I was divorced a couple year ago and I have the crap end of the stick,I am about fifty thousand in debt , but this also includes student loans.I currently have two garnishment out once fur the student loans and one I almost have paid now, but I only have one credit card and that it’s very small,, so this being said my credit score is trashed from this and I want to get rid of the debt what would be the best thing for me to do?

  • veronica m.

    My husband and I are $38,000 in debt. We currently own a home and are thinking of moving out of state in the next year or two. What is the best way for us to get out of debt? We barely go out or shop since money is extremely tight. We have 3 children and my husband is the only one working as I’m a stay at home mom. We’ve thought of borrowing from his 401k but will this hurt us when the mortgage lenders look into our accounts to purchase our future home.

  • Beth Walker

    My husband and I have been trying to buy our first house and keep hitting road block after road block. He has no current credit to go off of so we were advised to get a credit card or auto loan to build his credit but can not qualify for anything even with a cosigner due to a past repo and two judgments on his credit report. We are willing to do what we have to do to get this moving in the right direction but have no idea where to go from here. With the repo and judgments its around $23,000. Is debt consolidation the right thing for us?

  • Jane

    I am currently planning my wedding which has caused me to rack up quite a bit of credit card debt. I have 4 different credit cards with about 15000 total debt. My biggest issue is that my credit score has dropped from 750 to 680 due to this debt. We are planning on buying a house within the next year and in order to get the best interest rate through my work I need my score to be above a 730. Would getting a debt consolidation loan help me increase my credit score faster?

  • Brit

    I am a recent college graduate with a 5k line of credit, which has been close to maxed out for a few years. It’s is my only line of credit other than a care credit card that has a 2k limit with no balance. My score is 707 now. I am worried that the non profit debt relief program is going to significantly lower my score for a couple reasons:

    1. Credit age will be lowered. This is my main and oldest line of credit. The relief program counselor said the bank will close the account once I am officially enrolled.

    2. My credit utilization. I will only have one 2k line of credit w 0$, will this be good or bad for my score?

    3. I need a card for energencies. I know myself and I am not going to rack up more debt, but I don’t have savings of my car breaks down or something. I am thinking about taking out another card BEFORE the program’s starts, because the relief program is 51 months and they said if I open a new line of credit the bank can drop me. What should I do?

    I was hoping to get a mortgage in the next year.

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  • cubicle girl

    I’m a single mom with 30K in debt. Still live with parents and trying to get out of debt to eventually buy my own home. I have about 2 loans with 9K each and about 6 credit cards 10K and the rest in medical bills. All of them are above 15% interest rates. Normally I would take a credit card out with a lower interest rate to pay off all my high interest rate cards, but my mistake was not paying off those cards and racking them up too. Now I am way over my head with a an yearly income of only about 12K. So far I have been able to manage it and pay everything on time every month, but now I’m starting to struggle and everything is catching up. I was counseled to go to Luther Social Services Debt Consolidation. But through them I would pay a monthly fee for them to do the payments. I don’t like the idea of having to pay someone to pay my bills. AND I heard it would hit really hard on my credit and lower my score a lot. I also thought about borrowing against my 401K and having the payments come straight out of my paychecks, but then again, I don’t like the idea of the money not being there and not being invested. What would your advise be? 401K, debt counseling company, or sucking it up and continue the way I’m doing it. Please help..

  • Denise Layne

    I have a question. My current credit score hovers around 650 – 670 range. I have a high debt to credit ratio at the moment, and am considering a debt consolidation loan of about 14K.

    My question is: will it benefit my credit history more to get the loan sent to me and then pay my credit card debts of direct from me, or get the consolidation loan and have the lender to pay the (credit card debts) I am borrowing for?? I cannot seem to find an answer to this question!

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    I have a total of approx $30k in student loan debt, but because the way they report, I have 9 installment accounts for student loans. This significantly lowers my credit age because I have 7 credit card accounts that are much OLDER and each “new” student loan account lowers my age. I’m thinking of consolidating into 1 student loan (which would actually significantly RAISE my credit age if the other 9 accounts — the ones being consolidated — don’t still contribute to the credit age post-transfer. So that is my question (and I’m having a lot of difficulty getting an answer). Will my 9 student loan accounts still contribute to my credit age post transfer to the consolidated student loan account, or will ONLY the new student loan account contribute to my credit age (along with of course the 7 credit cards that HELP my credit age tremendously)? Thanks in advance. I really hope I can finally get an answer to this!

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