How Does Debt Consolidation Affect Your Credit?

Debt Consolidation Loan
Debt consolidation involves taking out a loan to pay off other debts. If you have credit card debt, for example, you may be struggling to make monthly payments on multiple credit accounts. In this case, debt consolidation can help you pay off your credit accounts and start fresh, allowing you to make one monthly payment as opposed to several. But how does debt consolidation affect your credit? It may decrease — at least for a short time — because you’ve taken several important steps at once.

Reasons Your Score May Drop

After you’ve taken out a personal loan, you may notice your credit score decrease for the following reasons:

  • You’ve Opened a New Credit Application: Before you can be approved for a personal loan or balance transfer credit card, the lender will conduct a hard inquiry on your credit, which can lower your credit score.
  • You’ve Opened a New Credit Account: Anytime you open a new credit account, which includes personal loans, your credit score may drop temporarily. New accounts are considered new risks.
  • You’ve Lowered the Age of Your Credit: When you open a new credit account, you lower the average account age on your credit report. Because there’s no history of on-time payments made to that account, your credit score may dip.

Is Debt Consolidation Worth It?

While your credit score may take an initial hit, there are benefits to debt consolidation that you’ll reap after you take out a personal loan:

  • Lower Credit Used: When you pay off your credit balances, you’ll lower your credit utilization ratio. This could reduce the damage done to your credit score because you’ll have more available credit to your name.
  • Improved Payment History: Payment history holds the most weight when it comes to your credit score. If you never miss a payment due date on your new loan and are otherwise careful with your credit, you’ll begin to see improvement.

So, to summarize, does debt consolidation hurt credit? Yes, but only temporarily. Of course, you’ll need to make on-time payments on your new loan to prevent further damage to your score. Over time, the negative impacts will be minimized by your improved payment history.

Learn More About Debt Consolidation With Xpress Cash!

Interested in taking out a personal loan to consolidate and pay off your debts, or are you interested in other options like a balance transfer? Contact us to learn more about your options and next steps! We have locations in three states: Michigan, Idaho, and Wisconsin.