Debt Consolidation Effects on Credit Scoring

Understanding the credit impact of debt consolidation.

When you need relief from debt – particularly credit card debt – there’s a certain balancing act that goes on. You want to get rid of the debt as quickly as possible, but you also want to avoid causing credit damage with whatever solution you choose. Otherwise, it creates more work for you to do to reestablish financial stability because you have to take steps to rebuild your credit, too.

The information below can help you understand both the positive and negative effects of debt consolidation on your credit score. If you have questions or would like an expert opinion on your best path to debt relief, we can help. Call Consolidated Credit today at or complete an online application to request a free debt and budget analysis from a certified credit counselor.

Debt consolidation effects really depend on your success

Whether debt consolidation ends up being good for your credit score or bad for it really depends on how successful you are at executing your consolidation plan. On paper debt consolidation should have a positive effect on your credit. However, that’s only true if you complete your debt consolidation plan successfully.

On the other hand, if you do things to sabotage your elimination strategy before you complete is successfully, then the impact on your credit can be significant… and negative.

The positive side of debt consolidation effects

From the outset of using debt consolidation, it solves one very big problem that too much credit card debt causes with your credit score – credit utilization.

Your credit utilization ratio is the amount of debt you have relative to your total available credit limit. It’s the second biggest factor in credit score calculations after credit history and it accounts for 30% of your total credit score. So if you are almost at the limit of each of your credit cards that actually has the ability to decrease your credit score.

In most cases when you consolidate debt it immediately decreases your credit utilization ratio. For example, if you use a personal credit card debt consolidation loan, you use the money you receive from the loan to pay off your credit card balances in-full. So you can go from a high utilization ratio to a low one within that first step of consolidating.

The second positive benefit is that debt consolidation SHOULD make it easier to keep up with your bills. As a result, you’re less likely to be late or miss payments completely. This helps you maintain a positive credit history, which is the biggest factor in credit score calculations. Credit history is 35% of your total credit score, so even just a few payments that are more than 30 days late can have a significant impact on your score.

So as long as you consolidate and can keep up with the payments, debt consolidation should have a positive effect on your credit score. Even if you consolidate with a debt management program, the overall effect should be positive as long as you complete the program successfully.

The negative side of debt consolidation effects

Debt consolidation should really only affect your credit score negatively if something goes wrong. In this case, there are a few different ways debt consolidation can negatively impact your credit score. Here’s what you need to know:

  1. When it’s bad for your credit history. If you can’t afford to keep up with your consolidated debt payments and you either pay more than 30 days late or miss payments entirely, it can be bad for your credit score. Each late payment creates a negative item in your credit report. The more negative items you have, the worse your credit will be.
  2. How you can make consolidation bad for utilization. Zero balances on your credit cards can be tempting and if you get tempted into running up new debt before you completely pay off the consolidated debt, then you’re actually increasing your debt load rather than reducing it. In this case, your utilization ratio goes back up quickly and since you also have the loan, your overall debt-to-income ratio will be high, too. As a result, you would have weaker credit overall.
  3. Closing your oldest accounts. It’s not a major factor in credit score calculations, but age of credit history does account for 15% of your credit score. So if after you consolidate your debt you close the credit card accounts you consolidated, then it can have a negative impact on your credit score. Just make sure to keep the accounts open even if you put a freeze on their usage.

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