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Can Debt Consolidation hurt Your Credit Score?
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Does Debt Consolidation Hurt Your Credit Score?
Consolidating debt into one payment which is more manageable can improve your credit and budget, but there are risks.
By Bev O'Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O'Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She has a bachelor's degree from journalism school at Auburn University and a master's in education from Georgia State University. Prior to joining NerdWallet, she worked for the daily papers, MSN Money and Credit.com. Her work has been featured on The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and many other places. Twitter: @BeverlyOShea.
Updated on Oct 12 2021
Editor: Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. Previously, she spent 18 years working at The Oregonian in Portland in roles including copy desk chief and team leader for design and editing. Prior experience includes copy editing and news for several Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communications and journalism at the University of Iowa.
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Consolidating debt can reduce the amount of your monthly payments, however it also can cause a temporary dip in your credit score. Two typical debt consolidation options include obtaining a loan or .
Each credit request typically puts an inquiry on your credit, which can lower your credit score by a few points over several months. But the overall credit effect of debt consolidation is positive if you are sure to pay on time and alter the behavior that led debt to stack up.
This is a review of the possible impact on your credit rating when you consolidate debt through an individual loan or balance transfer credit card, plus some other options for debt consolidation.
Be aware of how your credit score is evaluated
See your free score and the factors that influence it, as well as suggestions on how to build your score.
How debt consolidation can affect your credit
Combines several debts into one which is typically with a lower interest rate.
With fewer bills to handle, it helps with budgeting. And cutting the interest rate will help you pay it off faster since a larger portion of your monthly payments go towards debt rather than the interest.
Consolidating debts using a personal loan
Pros:
It generally requires a lower credit score for approval than a balance transfer card. (Not sure of where you stand? Verify your NerdWallet account.)
This can improve your situation If you only had credit cards, because it is an installment loan.
Can combine several payment into one, making it easier to manage your finances.
by lowering the amount of the credit limit you're using by transferring the balances of your credit card to the form of an installment loan.
Cons:
It could result in more debt if you use the new space on credit cards.
If you are overextended and in a position to not pay, late payments could damage your credit.
There are high costs to borrow money unless you understand the APR.
The loan could have the penalty of prepayment, locking the borrower into a specific date for repayment.
>> MORE:
Consolidating debt using the use of a balance transfer card
Pros:
It is possible to obtain an interest rate that is lower (often for a specific period of time), including a 0 APR for good credit consumers.
The payment process is more flexible than those with the loan.
No prepayment penalty.
Cons:
Your score could initially drop due to the fact that you've used a lot of the new credit limits of your card.
There could be interest due in the event that you don't settle the loan before the initial rate expires.
Other options for debt consolidation
If these options don't appear like the right fit There are many other options that also can affect your credit.
Be aware that it's not an ideal idea to substitute unsecured debt (like credit card debt) with secured debt (like a mortgage or car loan) as you could lose your house or car in the event that you are unable to pay.
The loan can be reported by way of installment loan or revolving account depending on the loan type you receive. Additionally, you'll have to pay for a an credit check.
Debt management plan: Meeting with the services of a credit counselor and signing up for a does not directly affect your credit score. However, the process of negotiating to pay less than the total amount due or closing credit cards could affect your score. A DMP will be noted on your credit report while it is in effect but not until the plan is completed.
: This does not appear on your credit report, which means it has no effect on your credit score. But you're costing yourself profits from investments and the impact increases with time. This should be considered an option last resort.
About the author: Bev O'Shea worked as a writer for credit at NerdWallet. Her work has been published on the New York Times, Washington Post, MarketWatch and elsewhere.
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