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How to consolidate debt without hurting your credit

Applying for more credit can cause your score to dip, but you may be able to mitigate it

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When you have a lot of debt, managing all of the individual payments can be overwhelming. Consolidating debt may be a good option to get more control of your finances and potentially reduce your interest charges. However, you don't want to make a bad situation worse by hurting your credit score. Here's how to consolidate debt without hurting your credit.

Key insights

  • Applying for a debt consolidation product will result in a hard inquiry on your credit report, which temporarily hurts your credit score.
  • Debt consolidation can ultimately improve your credit score by reducing credit card and other revolving balances.
  • Your credit score influences your approval chances for debt consolidation products and the rates you receive for those products if you’re approved.

What is debt consolidation?

Debt consolidation is the process of combining multiple debts into one debt. Consolidating your debts can offer many advantages, like simplifying payments, reducing your interest rate and fast-tracking your way to being debt-free.

Managing only one debt makes it a whole lot easier to track your debt payoff progress. Plus, it minimizes the possibility that you’ll miss payments and incur higher interest or additional fees as a result. A good debt consolidation product may also lower your interest rate, especially if you consolidate high-interest debts like a payday loan or credit card debt.

» MORE: How to get out of credit card debt

Does debt consolidation hurt your credit?

There are a number of factors that affect your credit. Here are the five factors of your FICO score and the amount of influence they each have.

  • Payment history (35%): This refers to your monthly debt payments. Making consistent, on-time payments each month can help keep your score high.
  • Amounts owed (30%): This is also known as your credit utilization, i.e., the amount you owe on revolving accounts, like credit cards and lines of credit, relative to your credit limits for those accounts. Maintaining a low credit utilization ratio is good for your credit score.
  • Length of credit history (15%): The longer you’ve had credit products in good standing, the better.
  • New credit (10%): Multiple hard inquiries in a short period of time will hurt your credit score. A hard inquiry will be made if you apply for a new credit product, and it might also be made if you request a credit limit increase for an existing credit product.
  • Credit mix (10%): Using a variety of credit products, including both installment and revolving credit, benefits your credit score.
A debt consolidation loan may have a positive impact on your credit score, but it depends on a variety of factors.

Your credit score may actually increase if you handle your debt consolidation strategically. The impact varies depending on your current credit score, the number and types of accounts you have open and your ability to make your new consolidated payments consistently.

Credit scores usually dip when you apply for new credit because of the hard credit inquiry. However, that negative impact can easily be reversed. If you keep old revolving accounts like credit cards open after consolidating debt and refrain from using those accounts, your utilization ratio will drop, and your score will improve.

Additionally, by making all your payments on time, you'll build a positive recent payment history, and the influence that previous late payments have on your credit score will gradually diminish.

Ways to consolidate debt without hurting your credit

It’s entirely possible to alleviate your debt burden without hurting your credit score. While debt settlement and bankruptcy are both valid debt relief options, they can devastate your credit for years and should be considered only in dire circumstances. Before jumping to such extreme measures, consider these consolidation alternatives instead.

A debt consolidation loan is a form of personal loan that allows you to consolidate your debt into a single loan with one monthly payment. These are typically unsecured loans and may be available at a lower interest rate than high-interest debt, like payday loans or credit card balances. The downsides are that the monthly payment may be larger than what you're used to, and there is no flexibility to make partial payments if you're short on cash.

» MORE: Best unsecured loans

Balance transfer credit cards may offer a 0% intro annual percentage rate (APR) promotion that lasts for a limited period, typically 12 to 21 months. This means 100% of your monthly payments made during the promotional period can go toward reducing your balance without interest accruing. However, many card issuers charge a balance transfer fee of 3% to 5%, which can negate the savings on interest. And be aware that the promotional APR reverts to the card’s standard APR at the end of the promotional period. That standard APR may be higher than the rates you paid prior to the transfer, which can put you in a worse situation if you don't make substantial progress in paying down your balance owed during the promotional window.

Additionally, the card issuer may not approve you for a high credit limit, so you may not be able to consolidate all of your debts onto the balance transfer card. Plus, you may have a high utilization ratio on this card if the consolidated balance takes up too much of your credit limit.

Home equity loans and home equity lines of credit (HELOCs) offer attractive interest rates because their balances are secured by your home. These rates are typically lower than the rates offered by unsecured personal loans, which can make them a low-cost way to consolidate debt. However, you usually need at least 15% equity in your home to qualify, as well as a low debt-to-income (DTI) ratio. Additionally, the approval process for HELOCs and home equity loans is longer and more complicated than the approval processes for alternative debt consolidation methods, like a personal loan or balance transfer card. Most importantly, if you don’t make your HELOC or home equity loan payments, it can put your home in jeopardy of foreclosure.
Friends and family may be in a position to help you conquer your debts. Depending on their financial condition, the money they offer could be a gift or a loan. But keep in mind that accepting this assistance could negatively affect your personal relationships if you don't repay the money or if your benefactor disapproves of your spending choices.
Many companies allow employees to borrow from their retirement accounts. These loans are then typically repaid by future withdrawals from your paychecks. Just be aware that if you leave or lose your job and you’re unable to quickly repay the loan in full, the remaining loan balance may be treated as income, and you might be hit with an early withdrawal penalty, depending on your age.
A debt management plan is a repayment plan managed by a credit counseling agency. The agency will negotiate with your creditors to reduce your interest rates and waive fees, making your debt more manageable. The goal is to have your debts paid off within three to five years if you make every payment on time. You'll pay the credit counseling agency directly, which will then distribute payments to each of your creditors included in the debt management plan.

Should you consolidate your debt?

Consolidation can be a good idea if you're having trouble managing your debt. It combines multiple debts into one easy-to-manage debt and monthly payment. You may be able to lower your monthly payment amount by reducing your interest or extending the repayment term. But many debt consolidation strategies require a credit score high enough to qualify for a new credit product with a low APR. If you have a low credit score, consider taking steps to improve it before consolidating your debt.

Derek Jacques, a consumer bankruptcy attorney at The Mitten Law Firm in Southgate, Michigan, suggests consulting with a financial professional before consolidating debt. He says debt consolidation can be a good debt relief choice in the right circumstances.

If you do decide to consolidate your debt, choose a consolidation method that suits your payment preferences and income patterns. With a debt consolidation loan or debt management plan, you'll have a fixed monthly payment amount and repayment term. When your debt consolidation loan reaches maturity or when you complete your debt management plan, the debt is paid off entirely. However, debt consolidation products with more flexible payments, like a HELOC or balance transfer credit card, might suit those with unpredictable incomes, like freelancers. But these revolving credit products also allow you to repeatedly make purchases, which can be problematic if you’ve struggled to control your spending in the past.

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    What’s the best way to consolidate debt?

    The best way to consolidate debt depends on your particular financial situation. A good credit score and consistent income are typically required to get approved for a consolidation loan. If your credit score isn’t high enough to qualify for traditional debt consolidation products, consider borrowing from friends or family, taking out a 401(k) loan or signing up for a debt management plan through a nonprofit credit counseling agency.

    What credit score do you need for a debt consolidation loan?

    The minimum credit score for a debt consolidation loan will vary by lender, with the minimum required by top lenders typically ranging from 560 to 660. In general, a higher credit score will be rewarded with a lower interest rate and more affordable monthly payments.

    Can you get credit in a debt management plan?

    A credit counselor may require that you abstain from getting new credit while you complete a debt management plan. Even if obtaining more credit is technically permitted within the terms of your debt management plan, it may nonetheless be unwise. Opening certain kinds of new credit products, like a mortgage, may signify to your counselor and your creditors that you could pay more toward your debt than you already are.

    Is a balance transfer better than a loan?

    There are pros and cons of using a balance transfer credit card instead of a loan. Balance transfer credit cards typically offer a 0% promotional APR for 12 to 21 months after paying a fee of 3% to 5% of the amount transferred. Any balance remaining after the promotional period ends is subject to the card’s higher standard APR. Loans don’t offer a 0% promotional APR, but some don't include origination fees, and your balance is fully paid off at the end of the loan’s term.

    Bottom line

    Debt consolidation helps you simplify your finances by making one monthly payment. Consolidating with a lower interest rate allows you to direct more of your payments toward reducing your principal, which will help you get out of debt faster and spend less money servicing your debt overall.

    Though your credit score may dip temporarily when you apply for a debt consolidation product, it should increase over time as you reduce revolving debts and make on-time payments.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
    1. FICO, "What's in my FICO Scores?" Accessed Feb. 16, 2023.
    2. Experian, "A Debt Management Plan: Is It Right for You?" Accessed Feb. 17, 2023.
    3. IRS, “What if I withdraw money from my IRA?” Accessed March 1, 2023.
    4. Consumer Financial Protection Bureau, “I filed for bankruptcy. How long will that appear on credit reports?” Accessed March 1, 2023. 
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