Does Debt Consolidation Affect Your Credit Score?

Consolidating debt can impact your credit score in both positive and negative ways. Debt consolidation usually involves a hard inquiry and may affect your credit utilization, credit mix and account age. Combined with positive financial habits, consolidation can actually help improve your credit over time by simplifying payments and helping you reduce debt.

Changes to your creditworthiness depend on how you consolidate debt and manage your future payments. Let’s take a closer look at different debt consolidation methods and how they may impact your credit.

What is debt consolidation?

Debt consolidation involves rolling multiple balances into one, typically with lower interest rates. Personal loans (sometimes called debt consolidation loans) and balance transfer credit cards are popular methods for consolidating debt. The goal is to simplify your monthly payments, reduce interest and help you pay off debt faster. Debt consolidation can help you create a clear payoff timeline and may even help you qualify for better credit terms in the future. Depending on your financial situation, both loan and card-based debt consolidation can give you better control of your finances and help you pay off debt more efficiently.

• Reduce interest costs, depending on the rate and term of your loan
• Simplify monthly payments
• Get a longer repayment term if necessary

Ways to consolidate debt

There are several ways to consolidate debt. Here are some popular options:

• Personal loan: You can use the funds from a personal loan for many different purposes, including paying off credit card debt. Personal loans are unsecured installment loans, which means they don’t require validation like a house or car, and you pay them back in fixed monthly installments.
• Balance transfer credit card: Some banks and lenders offer balance transfer cards that let you move your credit card debt to a different credit card. Some balance transfer cards offer a 0% introductory APR, which means borrowers can save on interest charges if they pay off the balance before the end of the offer term. Be cautious of high interest rates. When you pay off a balance before the special period or if the balance isn’t reduced, the rate and fees can be higher than typical. However, a balance transfer card can be financially beneficial if you’re balancing several debts.
• Home equity loan or home equity line of credit (HELOC): These financial products let homeowners borrow against their home equity. Home equity loans typically have lower rates than a HELOC or other credit card, but you risk foreclosure if you can’t make payments. Both loans and lines of credit can help you pay off debt and manage your finances, but you’ll risk losing your home if you can’t repay what you’ve borrowed.

How debt consolidation can help your credit score

Consolidating debt can help improve your credit if managed well.

• Easier on-time payment history: Consolidating debt can make it easier to stick to your repayment schedule. Making timely payments can improve your payment history, which significantly contributes to your overall credit score.
• Lower credit utilization: Paying off credit card balances lowers your credit card utilization ratio (the percentage of total available credit you’re using), which can boost your score. When you pay off credit cards with a personal loan, your utilization drops, which can also reduce your credit risk.
• Better credit mix: A new type of credit or loan can help diversify your overall credit mix. This may improve your score over time.

How debt consolidation can hurt your credit score

On the flip side, debt consolidation can lower your credit score—usually in the short term.

• Hard inquiries: Applying for a loan or line of credit will trigger a hard inquiry and a short dip, which can lower your score by a few points temporarily. Hard inquiries stay on your credit report for two years but usually disappear from your score after a few months.
• New credit account: Opening a new loan or credit card can lower your average account age and credit mix, which can lower the average age of your accounts, especially if you close old accounts after consolidating debt.
• Missed payments: Missing payments on your new loan or credit card can hurt your credit score. If possible, consider setting up automatic payments to avoid late fees and missed payments.
• High debt load: If you consolidate debt but continue to accumulate new debt, your credit score may drop. Try to avoid taking on new debt after consolidation.

Keep an eye on your credit as you pay off debt

Checking your credit report from time to time can help you track your progress after debt consolidation. You can easily get a free report from each of the 3 major credit bureaus every 12 months to check your payment history and account information.

Your credit report doesn’t include your credit score, but some credit cards and issuers will provide access to your credit score for free. Checking your score regularly may help you evaluate the impact of debt consolidation on your credit.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.