If you’re struggling with debt, you might be considering debt consolidation as a way to reduce your monthly payments and pay off your loans sooner. But does debt consolidation hurt your credit score?

The answer depends on which method you choose. Here is what you need to know about your options — and how those options can impact your credit.


How Does Debt Consolidation Work?

Debt consolidation means using a personal loan, credit card, or service to pay off debts. In turn, you may get a lower interest rate and may be able to consolidate your monthly payments into one.

For example, say you have $8,000 in credit card debt spread over four credit cards. Right now, you’re likely making four separate monthly payments with high-interest rates. To consolidate, you take out a debt consolidation loan for $8,000. The lender pays off your creditors and you make a monthly payment toward your loan.

Debt consolidation can be straightforward, but there are pros and cons to consider.


  • You may get a lower interest rate. 
  • You may have fewer monthly payments.
  • Your credit score could improve over time.


  • Those with poor credit may struggle to qualify for some debt consolidation options. 
  • With more available credit on credit cards, you may be tempted to take on more debt.
  • Some debt consolidation options carry fees.

If you’re considering consolidation, you should first understand how your options work — and how those options may impact you in the future:

Impact on your credit score

Whenever you apply for new credit, you'll see a hard inquiry on your credit report. That can have a negative impact on your credit score, but the effect may be relatively short-lived.

If you utilize debt consolidation to pay off credit card debt, you may improve your credit utilization ratio. Your credit utilization ratio is a comparison of your available credit and your debt. For example, if you have credit card balances totaling $4,000 and your credit limits add up to $8,000, your utilization ratio would be 50%.

Most experts recommend keeping your credit utilization ratio at 30% or less. By lowering your utilization ratio, you may see a boost in your credit scores. However, if you continue to use your credit cards and rack up new debt, your utilization ratio — and your credit score — will go down.

Over the longer term, making on-time payments on your loan can also improve your credit score.


Credit Card Balance Transfer

You can also transfer your credit card debt to a new credit card, known as a balance transfer. Typically, balance transfer cards also offer low or no interest introductory interest rates.

Impact on your credit score

It’s tough to know the exact impact to your credit score as there are many factors at play.  However, the new inquiry and new credit card will typically lower your score.  And if you transfer a balance for an amount close to your credit limit, your score could also suffer. 

On the other hand, by increasing your total available credit while maintaining your total debt, your total credit utilization will go down. This typically results in credit score improvement.  The good news is that if you reduce your balances with on-time payments you will see a positive impact on your credit score over the next 6 to 12 months. 


Debt Management Plan

These plans are offered by credit counseling agencies. The agency negotiates lower payments with your creditors on your behalf. You make one regular payment to the agency, and your credit counselor pays your creditors. Agencies often require that you close accounts so that you don’t accrue any new debt.

Impact on your credit score

Enrolling will trigger a “DMP” notation on your credit report which stands for Debt Management Plan. But this alone isn’t cause for concern. As long as the agency makes on-time payments on your behalf, there should be minimal impact on your credit score.

Closing accounts can negatively affect your score. But as you establish an on-time payment history, your credit score can improve over time.


Debt Settlement Program

Offered by specialized firms and lawyers, debt settlement programs aim to reduce the amount you owe.

Debt settlement programs are not a loan. Instead, you’ll stop making payments on your outstanding debts, and start making payments into an escrow account. When you have enough built up in the account, the firm contacts your creditors and offers to make a lump sum payment to wipe out the debt. The lump sum offered is less than the total amount owed. There is, however, no guarantee that the lender will accept a reduced amount on the outstanding balance .

Impact on your credit score

Missing payments while you wait to settle debts will hurt your credit score. Once you settle the debt, your credit report will show a “Settled” status. While that is better than an "Unpaid" status on your credit history, it likely won't help your credit score.

After you’ve settled the debt, you can focus on rebuilding your credit score.


Should I Consolidate My Debt?

Consolidating your debt can be beneficial, especially if you feel overwhelmed or are falling behind on payments. Consolidating can give you peace of mind, and simplify your finances, making debt management more straightforward. 

Before you move forward, you should weigh your options to decide what works best for you. It also helps to compare rates and terms with several lenders. By comparing your options, you’ll know you’re getting the best deal.

Next related article

Don’t Ignore Your Credit Card Debt—Do This Instead

Don’t Ignore Your Credit Card Debt—Do This Instead

April 24, 2018

Find out the four major consequences of disregarding your debt—including how it impacts your credit score—and what you can do instead to properly manage your debt.