Does Debt Consolidation Hurt Your Credit?

Mar 16, 2019

Trying to manage debt without damaging your long-term prospects? It’s not always an easy proposition.

Nearly 10 million people are over their heads in debt. And with debt comes stress. Many find themselves wondering how to make their monthly repayments, let alone how they can repay the debt in full. That’s why some turn to debt consolidation to help.

But what is debt consolidation, and does debt consolidation hurt your credit? Let’s take a look below.

What is Debt Consolidation?

Debt consolidation is a way of managing debt by opening another credit line with lower rates of interest. This allows the debtor to manage their current active debt with more favourable conditions.

That makes repayments more manageable and can limit the accrual of interest.

There are several methods of debt consolidation. The two most popular methods are through a balance transfer credit card debt consolidation or taking out a low-interest debt consolidation loan. 

Does Debt Consolidation Hurt Your Credit?

Debt consolidation can affect your credit score, but the exact impact will vary based on a range of factors.

For instance, here are some of the cons of debt consolidation:

Con: Credit Searches

When you apply for more credit, the creditor will run a “hard” check on your credit score. This search alone can impact your credit score. While one search may not move the needle much, too many searches in a short space of time can have a major impact.

Con: Higher Debt Level

Taking out a loan or balance transfer card will increase your levels of active debt, as it will initially only add to your current debts. The end goal of debt consolidation is to make repayment more manageable, but even with debt consolidation, that could mean many months of higher levels of debt in the meantime.

Pro: Staying Out of Arrears

Debt consolidation can make repayment more manageable. That could mean a reduced risk of defaulting on debt, which would otherwise lead to a major black mark on your credit score.

Your total debt is often less important than your ability to manage it, so winning back the ability to stay out of arrears can protect your credit score.

Pro: Drop Your Utilization Ratio

It’s true that debt consolidation can increase your active debt. But it also reduces your ratio of credit utilization, which can improve your credit score.

For instance, if you’ve maxed out your only credit card and have no loans, then you’re using 100 percent of your available credit. If you then added a balance transfer card for the same amount, then your credit utilization will drop to 50 percent until you use any of your new credit.

Does Debt Consolidation Hurt Your Credit? The Final Say

So does debt consolidation hurt your credit? The definitive answer is … maybe. Your personal circumstances will always affect your credit score, but by knowing how debt consolidation could affect your credit, you’ll know what to watch out for.

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