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

  • 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.

Catch up on CNBC Select's in-depth coverage ofcredit cards,bankingandmoney, and follow us onTikTok,Facebook,InstagramandTwitterto stay up to date.

Read more

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How a debt consolidation loan can help you improve your credit score

The simple mistake that caused this financial writer's credit score to drop more than 100 points

Looking to pay off your credit card debt but have fair credit? Here's the best card for you

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)


How bad can debt consolidation hurt 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.

What they don t tell you about debt consolidation? ›

When you consolidate your loans, there's no guarantee your interest rate will be lower. The lender or creditor sets your new interest rate based on your past payment behavior and credit score.

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 one bad thing about consolidation? ›

You may pay a higher rate

Consolidating your debt likely isn't the best move for your finances if you have a low credit score and can't secure a lower interest rate on your new loan. Your debt consolidation loan could come with more interest than you currently pay on your debts.

Is it smart to consolidate credit card debt? ›

Is it a good idea to consolidate credit cards? Consolidate your debt if you can get a better interest rate and/or it will help you make payments on time. Just make sure this consolidation is part of a larger plan to get out of debt and you don't run up new balances on the cards you've consolidated.

How long after debt consolidation can I buy a house? ›

However, most experts recommend waiting at least 2 years after finishing debt settlement before applying for a mortgage. Waiting gives you time to: Improve your credit – Negative marks from debt settlement stay on your credit reports for 7 years. But their impact lessens with time.

Is it good idea to consolidate debt? ›

If you're overwhelmed by multiple debts, debt consolidation might be a good option. This is particularly true if you can land a lower interest rate than the average rate you pay on your current debts. The lower your rate, the greater your savings.

Can you back out of debt consolidation? ›

A debt management plan (DMP) isn't legally binding, so you can cancel it if you feel it isn't working for you. However, you may not get a refund of your fees and you'll need to make sure you have another way of dealing with your debts.

How long does debt consolidation stay on your record? ›

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

What is 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.

What is the best debt relief program? ›

Summary: Best Debt Relief Companies of April 2024
CompanyForbes Advisor RatingBBB Rating
Accredited Debt Relief4.0A+
Money Management International4.0A+
New Era Debt Solutions3.8A+
3 more rows
Apr 1, 2024

What is the minimum credit score for debt consolidation loan? ›

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.

Why not to consolidate? ›

If your credit score isn't high enough to qualify for a lower interest rate, it may not make sense to consolidate your debts. You may also want to think twice about debt consolidation if you haven't addressed the underlying problems that led to your current debts, like overspending.

What are the 3 C's of credit? ›

The factors that determine your credit score are called The Three C's of Credit – Character, Capital and Capacity.

Why not to consolidate loans? ›

You might lose borrower benefits such as interest rate discounts, principal rebates, or some loan cancellation benefits associated with your current loans. Normally, consolidating your current loans could cause you to lose credit for payments made toward IDR plan forgiveness or PSLF.

Will my credit go up if I consolidate my debt? ›

However, credit cards and personal loans are considered two separate types of debt when assessing your credit mix, which accounts for 10% of your FICO credit score. So if you consolidate multiple credit card debts into one new personal loan, your credit utilization ratio and credit score could improve.

Is debt consolidation a good way to get out of debt? ›

If you're overwhelmed by multiple debts, debt consolidation might be a good option. This is particularly true if you can land a lower interest rate than the average rate you pay on your current debts.

How much does debt settlement affect your credit score? ›

Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.

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.


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