Does Credit Card Debt Consolidation Hurt Your Credit?

Before you choose any debt elimination strategy, it’s natural to wonder what short- and long-term effects it can have on your finances. Asking these important questions before you commit to a solution can help you prepare for what’s to come — while avoiding unforeseen surprises. Put it this way: Trying to make a major decision about debt relief without all the relevant information is sort of like trying to put together a puzzle without all the pieces present.

If you’re considering debt consolidation, for instance, you may be wondering about its potential effects on your credit score. Will it hurt your credit rating? Or could it perhaps even help your score? This is a great question that may ultimately affect your decision to consolidate or not consolidate. Let’s take a closer look: Does credit card debt consolidation hurt your credit?

How Credit Card Consolidation Could Lower Your Credit Score

Any time you apply for a new loan or credit product, creditors perform a so-called “hard inquiry” on your file. This is part of the approval process, as lenders use this information to assess your risk levels.

As Experian outlines, each hard inquiry can linger on your credit report for up to two years — and may slightly, negatively impact your credit score for a period of several months up to a year. Why? This impact penalizes borrowers from seeking out lines of credit from too many lenders within a short window of time, which lenders would view as a borrower desperately needing credit to stay afloat.

Two of the most popular consolidation options — getting a personal loan and getting a balance transfer credit card — will each trigger hard inquiries. This is why you can expect your score to drop a bit in the aftermath. Don’t fret, though; the benefits of paying off your debts consistently via consolidation will generally outweigh the damage from the hard inquiry pretty quickly.

How Credit Card Consolidation Could Raise Your Credit Score

The good news is that there’s even more potential for debt consolidation to raise your credit score as long as you keep making consistent payments.

Here are a few examples of how effective consolidation can boost your score:

  • Getting a personal loan to pay off your credit cards reduces the percentage of available credit you have in use, known as credit utilization rate (CUR). Experts have long recommended keeping CUR below 30 percent, but more are now advising borrowers actually try to stay below 10 percent. In this way a personal loan can help you optimize your credit card usage to, in turn, bolster your credit rating.
  • Getting a personal loan can also improve your credit mix, particularly if you mostly only had credit cards on your report before. Adding an installment loan to your portfolio can help strengthen your credit standing. In fact, credit mix accounts for 10 percent of your FICO rating, according to Investopedia.
  • Making consistent payments that work away at your debts through any consolidation method helps strengthen your record of on-time payments. Payment history is the most influential factor on your credit rating, accounting for about one-third of it, so in this way consolidating can help you raise your score over time. Of course, to reap this benefit you need a plan on how you’re going to make those payments consistently for however long it takes — often years — to become debt free. Missing one or more payments can have the opposite effect, inflicting damage on your score.

Credit card debt consolidation can hurt your credit score by launching hard inquiries, or if you miss any payments for whatever reason. However, it also brings about a host of opportunities to raise your score by improving your credit mix, credit utilization ratio and payment history.