Subhan Tariq, Esq
Will Debt Consolidation Hurt Your Credit?
Most debt consolidation methods will temporarily lower your credit score for a variety of reasons. For example, debt management plans ask you to quit using your credit cards. If you cancel a card, that reduces the amount of credit you have available and that can lower your credit score.
When you apply for a consolidation loan, lenders make a “hard inquiry” on your credit, which lowers your score by a few points.
If you’re shopping for the best option and there are several inquiries within a limited period, generally 14-45 days, the credit bureaus treat it as one inquiry. However, inquiries spread over more time will be seen as desperate attempts for credit and have more of a negative impact.
Other impacts of debt consolidation depend on the method. Loans and balance transfers have many potential negative effects, debt management plans very little.
No matter which method you choose, the biggest factor in how debt consolidation impacts your credit is how you treat your credit. Late payments on loans, credit cards, and other bills hurt your credit score. A payment that’s 30 days late stays on your credit report for seven years.
Making payments on time is the absolute best thing you can do to maintain good credit or repair poor credit.
Not accumulating more debt after making a debt consolidation move is also important. Don’t think that paying off credit cards bills with a consolidation loan means you’re free to go back using the cards recklessly again. That’s inviting more trouble.
Credit Factors Affected by Debt Consolidation
Many debt consolidation options will have minor negative impacts on credit, this is temporary. They will also have long-term positive effects.
The three major credit reporting bureaus: Experian, Equifax, and TransUnion take several things into account when determining a credit score.
Negative Effects on Credit
● Credit applications trigger hard inquiries that temporarily lower credit scores by a few points; several applications will have a greater effect over an extended period.
● A new account has no payment history until on-time payments are consistently made.
● The average age of credit accounts drops with a new account; the older the average, the better.
● If the debt is transferred to a card with a lower credit limit, the credit utilization rate will increase and that will lower your credit score.
Positive Effects on Credit
● The credit utilization rate will decrease if the debt is transferred to a card with a higher limit, or if a credit balance is paid off with a loan.
● On-time payment history always will strengthen your credit score in the long run.
Now that you know the ins and outs of how debt consolidation may impact your credit and how to stay on track.
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