Do Consolidation Loans Hurt Your Credit Score?

Consolidating debts into one payment and paying as agreed can help your credit and make budgeting easier – but there are risks as well. Consolidating your debt can lower your monthly payments, but it can also cause a temporary dip in your credit score. Two common debt consolidation approaches include getting a debt consolidation loan or a balance transfer card. Both types require a hard enquiry on your credit, which can lower your credit score by a few points. But if you change the habits that led to debt and pay on time, every time, the overall effect should be positive. Here is a closer look at the potential impact on your credit when you consolidate your debt with a personal loan or balance transfer credit card. We ask: do consolidation loans hurt your credit score?

How debt consolidation can affect your credit

Debt consolidation combines several debts into one, ideally with a lower interest rate and a faster payoff. Having fewer payments to juggle and saving on interest can help you pay off debt.

Do Consolidation Loans Hurt Your Credit Score? Consolidating with a personal loan


– Generally requires a lower credit score for approval than a balance transfer card.

– Can help improve credit mix if you had only credit cards before, because it is an instalment loan.

– Can combine several payments into one, simplifying your finances.

– Can improve credit by lowering the amount of credit limit you are using, known as credit utilisation, if unsecured credit card bills are moved to an instalment loan.


– It can lead to even more debt if you use newly available space on credit cards.

– If you end up overextended and unable to pay, late payments can damage credit.

– Paying high fees to borrow money.

– Having a prepayment penalty.

Consolidating with a balance transfer card


– Lower interest rate, including a 0% APR for excellent credit consumers.

– Flexible payments.

– No prepayment penalty.


– A lower credit score because of high credit utilisation.

– Not paying off the debt before the offer runs out, resulting in higher interest rate.

Do Consolidation Loans Hurt Your Credit Score? Other Options

If those options do not seem like a good fit, there are other debt consolidation options that also can affect your credit. Keep in mind it is generally not a good idea to replace unsecured debt with secured debt because you could lose your home or vehicle if you cannot pay.

– Home equity loan or line of credit: Will be reported as an instalment loan or revolving account, depending on which you get. You will also get hot with a credit check.

– 401k Loan: Does not appear on your credit report, so it has no effect on your credit score.

– Debt management plan: Seeing a credit counsellor and signing up for a debt management plan does not directly affect your credit score, but negotiating to pay less than the full amount due or closing credit cards can hurt your score. A DMP is noted on your credit report while it is in effect, but not after the plan is completed.