HomeCredit & DebtDoes Debt Consolidation Hurt Your Credit?

Does Debt Consolidation Hurt Your Credit?

Debt consolidation is a common tool for people who are seeking to get out of debt. While you may end up with a better credit outcome when it’s all over, it’ll hurt your credit in the short term. The two main ways that you can consolidate your debt are through taking out a personal loan or what’s called a debt consolidation loan and for credit card debt, refinance with a balance transfer credit card.

The credit bureaus are very particular about how many hard inquiries you have on your credit in the course of twenty-four months. Each time a lender requests your credit history via a hard inquiry you’ll lose a few points for a few months..

If you have ever wanted an in-depth view on how consolidating your debt can hurt, improve, or affect your credit, check out then look no further. 

How Will Debt Consolidation Affect Your Credit?

Initially when you begin the process of debt consolidation, inquiries may pop up where there weren’t any and cause a dip in your current score. However, the score decrease will only potentially last a couple of months, as long as other factors on your report remain positive. 

With debt consolidation, your payment history will weigh heavily on how quickly your score continues to improve. Unfortunately, one missed payment can have catastrophic consequences such as your score taking a nosedive or worse, your consolidation agreement defaulting. But, if you build a solid history then your score could increase by dozens of points by the time your debts are fully repaid.

When consolidating debt your score could also be impacted in the following ways: 

  • New Account Status – Anytime your credit report shows that you opened a new account, it shows lenders that you have been extended more credit and this is viewed as a risk that will lower your score.
  • Age of Credit Length Decreases – Your credit history is largely based on the age of your oldest account. This shows how long you have been handling credit responsibly. Since new accounts reduce this time frame, they can also cause a slight ding to your overall score.
  • Percentage of Credit Utilized Decreases – Your credit utilization ratio is determined by how much credit you have versus how much you are actually using. By taking out a debt consolidation loan, your ratio will improve due to the higher amount of available credit.

Does Debt Consolidation Appear on Your Credit Report?

While debt consolidation doesn’t technically appear directly on your credit report, the amount of the loan that you will have to take out is a huge indicator to lenders and potential creditors that you are paying off a sizable debt. 

Although it may be pretty substantial when it comes to evaluating your accounts and payment history, the loan can also help you in that you suddenly have a significant increase in available credit. 

Unlike other alternatives that can have damaging effects on your credit score and credit reports such as debt settlement, debt consolidation, or bankruptcy, opting for debt consolidation won’t stick around for the next seven to ten years. 

Easy Ways to Consolidate Your Debt

Since the main premise of consolidating your debt is to combine or merge all of your account balances into one jumbo loan, there are a variety of ways that you can make this happen. The method that you choose depends on things like your credit, savings, budget, and financial goals.

  • Take out a personal loan – Applying for a personal loan can help you become debt-free by putting all of your accounts into a loan from a lender with whom you already have an established history. This increases your likelihood of approval and makes it easier to establish a line of credit later once your debt has been repaid.
  • Use a home equity line of credit (HELOC) Using the equity in your home based on the amount of ownership you have is another great way to get a loan for paying down your debts. The lower interest rates will allow you to get in the clear faster, without paying a bunch of additional interest. 
  • Consider a balance transfer – Depending on the amount and type of credit card you have, many lenders will allow you to do a balance transfer of your existing debt to one of their cards. This may allow you to pay off two debts in one while still enjoying rock bottom interest rates. 
  • Take a 401k Loan – Some account administrators allow you to take a loan from your 401k or another retirement account as long as you pay back the funds. Just keep in mind that there is a tax penalty or fee if it’s outside of the allowable parameters.
  • Opt for a debt settlement – Debt settlement is always an option if it seems as though the other methods aren’t quite working out for you. However, this won’t eliminate your debt, as the remaining amounts could pop back up in unexpected places. 

Are There Negative Consequences to Consolidating Debt?

Debt consolidation has many benefits that most people haven’t considered. However, they also come with some negative consequences that can be a little off-putting to say the least, if you didn’t plan for it ahead of time.

Some of the most common ways that debt consolidation can turn into an unpleasant experience are:

  • Drop in credit score – When consolidating your financial obligations regardless of the method that you choose, your credit score will decrease. Although this may not be ideal, with a few regular payments and a little bit of time, your score will improve and could end up better than before.
  • Lots of hard inquiries – Sometimes shopping for a consolidation loan will require you to go through multiple lenders. Each time they pull your credit to decide if you will be a suitable candidate, it will cause a hard inquiry. Too many of these will undoubtedly drop your score by a couple of points with each pull. 
  • Pressure to cancel unused accounts – When done correctly, paying off a large debt consolidation loan on your credit, will erase the balances on your previously defaulted accounts. Canceling these accounts does more damage than good because it affects the main factors that help determine your overall score. 


Debt consolidation affects millions of individuals every year, and many of them come out of the situation with a positive payment history as well as a higher credit score. If you are considering getting a loan to pay down your debts, be sure to consider your financial picture, the benefits, and the consequences if things don’t go as planned.

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