Consolidation helps you avoid taking hits to your credit.

A big concern that you may have as you work to get out of debt is how a particular solution may affect your credit. If you’re considering debt consolidation, there’s good news. When done correctly, consolidation should have no negative effect on your credit profile, In fact, in many cases, it’s shown to help consumers improve their score.

How is debt consolidation reported on a consumer credit report?

Debt consolidation should not result in any negative remarks on your credit report, as long as you’re able to all the payments on time. This is true whether you use a consolidation loan or a consolidation program.

If you consolidate using a personal loan, you will see the new account reported on your credit report. That loan will build a credit history just like any other account. The credit cards and other loans you pay off using the loan will show a zero balance.

If you use a debt consolidation program, it will not generate a new account on your credit report. Instead, the accounts included in the payment will show payments being made on time.

As you make payments and they get distributed to your creditors on your behalf, you will build positive payment history, Your balances will also gradually decrease one-by-one until they all show a zero balance. Then as you complete the program, the accounts will be closed and show a status of paid in full.

How does debt consolidation affect your credit score?

There is no exact numeric increase or decrease to a consumer credit score caused by debt consolidation. What consolidation does to your score depends on your specific history as a credit user.

In general, the overall effect on your score should be positive if everything goes smoothly after you consolidate. There are some instances where consolidation may ding one of the lesser factors used to calculate your credit score.

Understanding the 5 credit score factors

There are five basic factors used to calculate consumer credit scores such as FICO and VantageScore. Each factor has a different “weight” for how much it factors into your score:

  • Credit history – 35% 
  • Credit utilization – 30%
  • Credit age – 15%
  • Credit applications – 10%
  • Credit mix – 10%

Positive effects of consolidation

As long as you make all your consolidated payments on time, then consolidating your credit accounts will help you build a positive credit history.

It also improves your utilization because your balances drop to zero. Utilization measures the amount you owe versus your total available credit. If you have a balance of $500 and a credit limit of $2,000, then your utilization ratio is 25%.

Anything above 30% is bad for a consumer credit score and a low utilization ratio is always better. With consolidation, you reduce your ratio to 0%. This happens immediately with a loan. With a consolidation program, it happens over time as you complete the payments.

Potential negative score effects of consolidation

Debt consolidation may have some negative effects on some of the lesser scoring factors. However, the exact impact depends on where your score started and which type of consolidation you use.

Opening a new loan will increase the number of new credit applications you have by one. This should only drop your score a few points. But it will also decrease your average credit age because the loan is brand new. So, if your score is extremely high when you take out the loan, you might see a slight drop.

This also depends on how many old, active accounts you have. If you have a number of active, open accounts that you’ve had for a while, the effect on your credit age may be negligible. If you don’t have many accounts, then the impact will be greater.

If you use a consolidation program that closes your accounts or you decide to close your credit cards yourself after you pay off the balances, then you will decrease your credit age. You’ll close all your credit cards, which will significantly decrease your credit age. This also reduces your credit mix, because you don’t have as many accounts.  Keep in mind that any dings to your credit score will be temporary and can be offset by taking positive actions for your credit moving forward. What’s more, consolidation can help you avoid the more significant credit damage caused by missed payments, charge-offs and other solutions such as bankruptcy.

Scroll to Top