Debt consolidation might hurt your credit — here's how to avoid the damage (2024)

Debt consolidation can be an excellent solution if you have multiple debts you're struggling to keep up with. It makes getting out of debt easier — and sometimes cheaper.

That said, debt consolidation isn't a magic bullet. It can temporarily ding your credit scores or bring even more damage if you're not disciplined with your debt repayment. Below, CNBC Select discusses what debt consolidation can do for your wallet and your credit and how to get the most out of it.

Debt consolidation and your credit

How debt consolidation works
How debt consolidation can affect your credit
Making debt consolidation work for you
Bottom line

How debt consolidation works

The idea behind debt consolidation is simple. You take multiple unsecured debts and combine them into one, ideally with a lower interest rate. The most common ways to do that include a debt consolidation loan and a balance transfer card.

Other means of debt consolidation

Additional debt consolidation options include a home equity loan or line of credit (HELOC) and a 401(k) loan. Bear in mind that with these loans, you're borrowing against your assets to pay off unsecured debt, which is generally not the best idea.

With a debt consolidation loan, you apply for a specific amount of money to cover your total debt. If the lender approves you, it will usually pay your creditors directly or deposit the funds into your bank account. Once you've eliminated your debts, you'll just have one loan to pay with fixed monthly payments.

If your credit is in good shape despite your debt load, look into lenders such as LightStream. We ranked this lender as providing the best debt consolidation loan for people with good-to-excellent credit because it offers a low interest rate and same-day funding. Plus, you don't have to pay any origination, early payoff or late fees.

LightStream Personal Loans

Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.

Successfully applying for a debt consolidation loan when you have a lower credit score may be a challenge, but you still have plenty of options. CNBC Select ranked Achieve as the best lender for those with less-than-ideal scores — you can qualify with a credit score of at least 620 and check whether you're likely to be approved before you apply.

Achieve® Personal Loans

  • Annual Percentage Rate (APR)

    8.99% to 35.99%

  • Loan purpose

    Debt consolidation, major purchase

  • Loan amounts

    $5,000 to $50,000

  • Terms

    24 and 60 months

  • Credit needed

    620 or higher

  • Origination fee

    1.99% to 6.99%

  • Early payoff penalty


  • Late fee

    See terms

Terms apply.

Consolidating your debts with a balance transfer credit card works similarly to a loan. If you carry a balance on one or more credit cards, you can move that debt to a balance transfer card with an intro 0% APR offer, usually for a fee of between 3% and 5% of the transaction amount. This will allow you to pay the balance without interest charges for a specified period. For example, the Wells Fargo Reflect® Card offers a 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers (18.24%, 24.74% or 29.99% variable APR thereafter).

Wells Fargo Reflect® Card

On Wells Fargo's secure site

  • Rewards


  • Welcome bonus


  • Annual fee


  • Intro APR

    0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.

  • Regular APR

    18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers

  • Balance transfer fee

    5%, min: $5

  • Foreign transaction fee


  • Credit needed


See rates and fees. Terms apply.

How debt consolidation can affect your credit

If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.

Then, as you keep paying off your debt, your credit should go up since you'll be improving your credit utilization ratio, or how much of your available credit you're using. The lower this ratio is, the better — anything over 30% can damage your credit. Credit utilization has a huge effect on your credit score (second only to payment history), so keeping it low should give your score a big boost.

Don't become your own worst enemy

When you combine your debts into one, you'll likely find it easier to manage your repayments, especially if the interest rate of this new loan is lower than the rates on your original loans. This is especially true if the interest rate on the new loan is lower than your original interest rates, or if you're using a balance transfer card. Naturally, you might feel tempted to continue using your credit cards now that your debt seems less of a worry.

But that would set you up for a world of hurt. If you keep adding to your debt, you may find it has become hard to stay on top of your payments again. Slipping and missing even a single payment can cause significant damage to your credit. Further, late payments stay on your credit reports for seven years. As a result, you risk ending up with even more debt — and a lower score.

Making debt consolidation work for you

Debt consolidation can be a good strategy but it requires some discipline to work. Here's how to avoid digging yourself deeper into debt during the consolidation process:

  • Know your budget and stick to it. This is especially important if your new interest rate is higher, meaning you'll pay more in interest charges. Make sure you're not taking on a loan you realistically can't afford.
  • Avoid taking on new debt. Focus on paying down your current debt without adding to it. If you continue charging your credit cards, you might swipe yourself into a new pile of debt.
  • Shop around for a lender. Compare different offers to find the lender that can provide you with the best terms, such as lower interest and no prepayment penalties in case you can pay off the loan before the term's end.
  • Set up autopay. This feature will help you avoid late payments. Plus, some lenders offer discounts for enrolling.

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Bottom line

If you do it right, debt consolidation will only cause a minor hit to your credit, after which your scores should quickly rebound. After that, paying down the debt will likely have a beneficial effect on your credit health. That said, remember to exercise discipline and stick to good financial habits when consolidating your debt — otherwise, you risk making matters worse.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every credit guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of credit products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best credit products.

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Read more

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

Debt consolidation might hurt your credit — here's how to avoid the damage (2024)


Debt consolidation might hurt your credit — here's how to avoid the damage? ›

Debt consolidation loans can hurt your credit, but it's only temporary. The lender will perform a credit check when you apply for a debt consolidation loan. This will result in a hard inquiry, which could lower your credit score by 10 points. Hard inquiries will only affect your credit score for one year.

How bad does debt consolidation hurt your credit? ›

Debt consolidation loans can hurt your credit, but it's only temporary. The lender will perform a credit check when you apply for a debt consolidation loan. This will result in a hard inquiry, which could lower your credit score by 10 points. Hard inquiries will only affect your credit score for one year.

How long does credit ruined after debt consolidation? ›

Debt settlement will remain on your credit report for seven years. This means that for those seven years, your settled accounts will affect your creditworthiness. Lenders usually look at your recent payment history.

How can I consolidate my debt without affecting my credit score? ›

Best Options to Consolidate Debt Without Hurting Your Credit
  1. Personal Loans. A personal loan is one of the most common methods of merging multiple debts into one. ...
  2. Home Equity Loans. With a home equity loan, you can borrow against your home's equity and use the money to pay off existing debts. ...
  3. Balance Transfers.
Sep 13, 2023

What is a disadvantage of debt consolidation? ›

You may pay a higher rate

Your debt consolidation loan could come with more interest than you currently pay on your debts. This can happen for several reasons, including your current credit score. If it's on the lower end, lenders see you as a higher risk for default.

Is it smart to consolidate debt? ›

Consolidating debt can be a good idea if you have good credit and can qualify for better terms than what you have now and you can afford the new monthly payments. However, you might think twice about it if your credit needs some work, your debt burden is small or your debt situation is dire.

Can I still use my credit card after debt consolidation? ›

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.

Can I buy a house after debt settlement? ›

Yes, you can buy a home after debt settlement. You'll just have to meet the lender's requirements to qualify for a mortgage. Unfortunately, that could be harder after you settle debt.

Can I buy a car after debt settlement? ›

Yes, auto loan lenders don't exclude those who have gone through bankruptcy. However, you'll pay higher interest rates if you finance the vehicle after receiving a bankruptcy discharge.

Does debt consolidation affect buying a home? ›

5 As we mentioned already, getting a lower monthly payment on a personal debt consolidation loan can lower your DTI and make it easier to qualify for a mortgage. However, the opposite is also true, and a debt consolidation loan with a higher monthly payment could make qualifying more difficult.

How much debt is too much to consolidate? ›

Debt consolidation is a good idea if your monthly debt payments (including mortgage or rent) don't exceed 50% of your monthly gross income, and if you have enough cash flow to cover debt payments.

What's the best debt consolidation company? ›

Best debt consolidation loans
  • SoFi: Best for fast funding.
  • Upgrade: Best for poor or thin credit.
  • Achieve: Best for quick approval decisions.
  • LendingClub: Best for co-borrowers.
  • Discover: Best for excellent credit.
  • Happy Money: Best for credit card consolidation.
  • LightStream: Best for large loans.

How can I pay off my debt without consolidation? ›

14 Easy Ways to Pay Off Debt
  1. Create a budget.
  2. Pay off the most expensive debt first.
  3. Pay off the smallest debt first.
  4. Pay more than the minimum balance.
  5. Take advantage of balance transfers.
  6. Stop your credit card spending.
  7. Use a debt repayment app.
  8. Delete credit card information from online stores.

Why not to consolidate loans? ›

Consolidation has potential downsides, too: Because consolidation can lengthen your repayment period, you'll likely pay more in interest over the long run.

What is better debt consolidation or debt settlement? ›

While consolidating debt can temporarily impact your credit score due to a credit inquiry and the new account, it generally has a less severe and shorter-lived impact than debt settlement. Your credit history remains intact, and as you make on-time payments on the consolidated loan, your score will improve over time.

What are 4 things debt consolidation can do? ›

Loan debt consolidation is when you take out a new loan to pay off multiple debts. Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt. You may reduce the overall cost of repayment by securing better terms and interest.

Does debt consolidation affect buying a car? ›

No, debt consolidation doesn't affect buying a car.

Still, in scenarios where the company wants to purchase the car by securing a loan, it may be affected by the debt arrears, which are part of the considerations creditors consider before giving out loans.

Does debt forgiveness ruin your credit? ›

There are a couple of aspects of credit card debt forgiveness programs that can damage your credit: You stop making payments to your creditors as you save for your settlement. Creditors typically report the debt as "settled" rather than "paid as agreed" on your credit report once it's paid off.

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