How Does Debt Consolidation Hurt Your Credit?

If your credit card bills are piling up and you merely can ’ metric ton juggle any more, a balance-transfer tease or loanword can consolidate your debt, but doing so may besides have a lasting impact on your credit rating .

While combining your outstanding balances can simplify repayment, reduce stress, and most importantly, save you money on pastime over time, this overture can ding your credit score and history if you ’ rhenium not careful .

Learn how debt consolidation can hurt your credit .

hard Inquiries Ding Your Credit Report

When you apply for a new credit account to consolidate debt, the lender will check your credit, leading to a alleged hard inquiry on your recognition report. Each hard question can temporarily lower your credit score by up to five points because lenders look at raw credit applications as a sign of risk .

To avoid a big hit, only apply for a loanword or balance transfer batting order you can qualify for. Don ’ deoxythymidine monophosphate apply for new accounts left and right and cross your fingers for approval. multiple hard inquiries created by a recognition poster or personal loanword application in a short time period of time will decidedly hurt. While those inquiries will only impact your credit score for a year, the records will linger on your credit history for two years, which could be a crimson sag to future lenders .

Check your recognition mark before applying and take note of how your score is categorized : Is it considered honest, good, or excellent ? Use that information to guide your loanword or credit batting order selection. On the plus side, if you are consolidating debt, you likely won ’ thyroxine ( and shouldn ’ metric ton ) open another newly line of credit any time soon, so a impermanent dunk in your credit score may not matter .

New Accounts Lower Your Average Credit Age  

Opening a fresh accredit tease or taking out a loanword for debt consolidation will lower the median old age of all your credit accounts, which may besides temporarily lower your accredit score .

The length of your citation history makes up 15 % of your FICO credit score and specifically factors in the age of your newest account. A brand new score doesn ’ thyroxine however have a convinced credit history, so your score will benefit as you make on-time payments and the account ages .

While some situations can ’ deoxythymidine monophosphate be avoided, the adjacent three decidedly can be. Pay close up attention so you know what not to do after consolidating your debt to keep your credit score on the up and up.

Racking Up More debt After Consolidation Raises Utilization Ratio

One of the biggest risks associated with consolidation is running up new debt before you ’ ve paid off your old symmetry. If you succumb to the spend enticement of a newly paid off credit circuit board, any credit score improvements you see will promptly disappear .

hera ’ mho why : When you consolidate your debt into a modern report to pay off early cards, your overall sum of available accredit increases, lowering your credit rating use proportion. The lower that ratio is, the better your FICO credit score will be. ( It accounts for 30 % of your score. )

But, if you don ’ triiodothyronine leave those credit limits alone on your older cards, you ’ ll get yourself in trouble again. here ’ s an exercise of how pile new debt on top of consolidate debt will increase your credit use proportion and be a dredge on your score :

Card and Credit Limit Balance After Debt Consolidation Balance After Debt Consolidation + New Debt
Card No. 1: $2,000 limit $0 $500
Card No. 2: $3,000 limit $0 $1,200
Card No. 3: $5,000 limit $0 $2000
Card No. 4: $15,000 limit (balance transfer card used for consolidation) $7,000 $7,000
Credit Utilization Ratio: 28% 43%

Rein in your spend habits, or you ’ ll be juggling multiple debts again, including a large consolidated debt history. This could soon overwhelm your budget and lead to late payments, or worse—default.

Closing Old Credit Cards Reduces Available Credit

If you ’ ve been spooked by the previous warn, don ’ deoxythymidine monophosphate go besides far to restrain your spend. That is, preceptor ’ t go american samoa far as to close those old, balance-free credit cards. That will actually hurt your credit score besides .

By keeping the cards afford and paid off, you will reduce that oh-so authoritative credit use ratio we just discussed, positively impacting your credit seduce while you pay down your consolidate debt. Close the cards and your credit score will take a hit .

here ’ s an exercise of how close unused credit cards could raise your credit use ratio, using the lapp four wag scenarios :

Card and Credit Limit Balance After Debt Consolidation Balance After Debt Consolidation + Closing Cards
Card No. 1: $2,000 limit $0 N/A
Card No. 2: $3,000 limit $0 N/A
Card No. 3: $5,000 limit $0 N/A
Card No. 4: $15,000 limit (balance transfer card used for consolidation) $7,000 $7,000
Credit Utilization Ratio: 28% 47%

See how those empty cards can work in your favor while you pay off that symmetry transfer calling card ? so alternatively of close unused cards, tuck them away while you pay down the consolidated debt balance. If you ’ re likely to buckle, lock the physical cards in a dependable, or freeze them in water. Make sure you remove all automatic payments from those cards and clear saved wag details from any on-line shop accounts to eliminate far temptation .

If overspend is a good concern and your budget is already under imperativeness, closing empty cards may be in your best interest after all. Your sexual conquest may dip temporarily, but you can more easily bounce back from that kind of a strike than from more suffocate debt. Just make surely to close cards with caution.

Being deep or Missing Payments Clouds Credit History

It ’ s absolutely crucial that you make all your debt consolidation payments on clock time each calendar month until the balance is repaid. Payment history has the biggest charm on your FICO score, and records of late payments will damage it .

If you ignore the debt consolidation counterweight and stop making payments raw, your report will become delinquent and the lender will send it to collections. collection records stay on your credit report for seven years and until that fourth dimension passes, your credit will suffer vastly .

If you are suddenly facing fiscal difficulties and worried you ’ ll miss a consolidated debt payment, call your credit card or lend issuer before your payment becomes late and your credit score takes a hit. There may be fiscal asperity options available .

The Bottom Line

If you make reproducible, on-time payments and don ’ t incur any new debt, consolidating existing debt into a single, gloomy interest history, whether it ’ s a balance-transfer citation wag or lend, can make the charge more accomplishable and lower your credit utilization proportion. Any short-run negative impacts on your recognition score will fade with meter. And smart use of your credit down the road will boost your credit grade in the long run—and help you avoid another situation where you ’ ll indigence to consolidate your debt .

Article Sources

  1. myFICO. “ What ‘s in my FICO Scores ? “ Accessed July 2, 2021 .

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