Financial Fundamentals Blog

Will Debt Consolidation Help My Credit Score?


Debt has reached record highs in 2022. This high debt balance includes student loans, personal loans and credit cards, leaving many adults in the U.S. searching for relief from the overwhelming amount of debt.


If you carry any amount of debt between multiple loans, credit cards or both, you may be considering debt consolidation. However, there are a number of things to consider when it comes to debt consolidation to make sure it is the right choice for you. 


One thing you may be worried about is whether debt consolidation will help improve your credit score. We’re taking a look at how exactly debt consolidation affects your credit score and how you can minimize any negative impacts.


How Can Debt Be Consolidated?

There are two primary ways debt can be consolidated. One is through a personal loan in which you’ll pay off each individual debt and then only make payments on the personal loan. The other is through a balance transfer credit card in which you’ll transfer the balance of individual credit cards to the new credit card.


There are a couple of important points to remember about debt consolidation:

  • Make sure the new interest rate is better than your current interest rates.
  • If you choose the balance transfer route, try to look for a 0% interest introductory period, which usually lasts between 12–18 months, and pay off your debt before the introductory period ends.
  • Avoid using credit cards after you’ve consolidated your debts. If you need to keep your credit cards open, put a small purchase on them once every three months and then immediately pay it off.


The method you choose to consolidate your debts affects your credit score differently. For example, consolidating your debts with a balance transfer credit card may help lower your credit utilization rate and improve your credit score if the card has a higher credit limit.


Negative Impacts of Debt Consolidation

It’s important to note that the negative impacts of debt consolidation are temporary. First, when you look into a consolidation option, whether it’s a balance transfer credit card or a personal loan, there will be a new credit inquiry on your account. However, this doesn’t harm your credit score too much — it only decreases your score by a few points. 


Opening a new account will also affect the average age of your accounts in your credit history. However, as long as additional accounts aren’t opened, the age of your accounts will improve over time. 


Depending on how you proceed with consolidation, your credit utilization percentage may take a hit. For example, if you proceed with a balance transfer credit card with a lower limit than your current accounts or if you transfer your balances and then close your current accounts, your utilization percentage will increase until you start paying down your balances. 


Positive Impacts of Debt Consolidation

Consolidating your debt may temporarily decrease your credit score, but over time, it will help you build better credit and increase your score. Just like a lower limit balance transfer card can hurt your score, the reverse is also true: A higher limit balance transfer card can improve your credit score because it will lower your utilization percentage. If you use a personal loan to consolidate your debt payments, your credit card utilization score will also decrease as long as you don’t continue to use your credit cards. 


Paying your bills on time is the largest factor that goes into a credit score calculation. Therefore, if you continue paying your bills on time, you’ll see improvements in your credit score. 


Consolidating multiple payments into one payment may also help with paying off debts quicker if you have lower interest and lower payments each month. This will make it easier to put extra money toward your payments, thus improving your credit and reducing the amount of interest you pay over the life of the loan or balance transfer credit card.


Improve Your Financial Health

Having debts — no matter if it’s a student loan, credit card or other personal loan — can be overwhelming. However, there are steps you can take, including debt consolidation, to help improve your credit score

Learn more and access helpful resources by becoming a credit union member and opening a checking account today.