How does debt consolidation affect your credit score?

Debt consolidation can affect your credit score negatively in the short-term if you get a loan or credit card and the lender performs a hard inquiry into your credit history. Over the long-term, debt consolidation is likely to have a positive effect by raising your credit score if you make your monthly payments on time.

To estimate how debt consolidation may affect your credit score in particular, check out the free credit score simulator on WalletHub. You can also read more about debt consolidation’s impact below.

How Debt Consolidation Affects Your Credit Score

1. Hard inquiry

   If you get a debt consolidation loan or a balance transfer credit card, the lender will more often than not do a hard inquiry into your credit history. A single hard inquiry will likely lower your credit score by about 5 - 10 points, and many inquiries into your credit history within a short period of time can cause more significant damage.

2. New account on your credit reports

   New credit represents about 10% of your credit score. The addition of a new credit card or loan account may temporarily damage your score. On the other hand, the longer your accounts are open and in good standing, the better your credit score should be.  

3. Changes to your credit utilization

   Credit utilization – the ratio of how much credit you’re using compared to your credit card limits – is included in a segment that accounts for 30% of your overall score. If you consolidate your debt with a balance transfer credit card, your overall credit utilization could increase, damaging your score. On the other hand, consolidating your debt with a loan could lead to a drop in your overall credit utilization, which would cause your score to increase.

4. Payment history

   When you make a monthly payment on time, the lender will report positive information to the credit bureaus, which will increase your score. However, if you don’t make payments, the lender will report negative information and your score will go down.

   
   

   There’s no way to know exactly how debt consolidation will affect your credit score. But in most cases, debt consolidation will lead to long-term credit score improvement since it decreases your odds of default and puts you on more stable financial ground. To estimate how consolidation will impact your score, check out WalletHub's free credit score simulator.