Does debt consolidation hurt your credit score?

Quick answer: Debt consolidation can lower your credit score at first but may help improve it in the long run. It usually means taking out a loan, which leaves a mark on your credit report. If the loan helps you pay what you owe, your score may improve over time if you keep up repayments and reduce debt.

If you’re consolidating debt with a loan, you can expect to see your credit score change. There’s usually a short-term dip. But in the long run, debt consolidation can improve your score if it helps you make payments on time and clear your debt.

Read on to learn how debt consolidation can affect your score, and when to consider alternatives like balance transfers or debt relief.

Do debt consolidation loans hurt your credit score?

Like with most types of loans, taking out a debt consolidation loan can nudge your score downwards — at least to begin with. But in the long run, debt consolidation could improve your score by helping you pay lenders back.

Here’s why debt consolidation can cause a temporary dip in your score:

• Application — A hard credit check is recorded on your report when you apply for a loan. If lenders see too many checks on your report, they may think you’re in financial trouble. Most hard searches stay on your report for 12 months.
• New borrowing — A new loan increases your total borrowing. Some lenders may see this as a risk, making them less likely to approve you for new credit. On the other hand, paying off your other debts should be viewed positively by lenders.
• Closed accounts — You may decide to cancel credit cards and other accounts after clearing them with a debt consolidation loan. This reduces your available credit, which can harm your score if you have high balances on other cards. Closing older accounts can also lower the average age of your accounts, which some lenders may see negatively.

It’s worth understanding what affects your credit score before taking out a debt consolidation loan. If you take out a loan, look after your credit by making the payments on time and keeping your card balances as low as possible.

Want to keep an eye on your credit health? Check your free score and report with the Experian app. Don’t worry, viewing your score won’t affect it.

How do debt consolidation loans work?

Imagine you’re juggling four different types of debt at once — a credit card bill, a car loan, a store card, and a personal loan. Each one has a different due date, a different interest rate, and a different minimum payment. It can be exhausting keeping on top of it all.

A debt consolidation loan lets you swap all those bills for just one. You take out a single new loan and use it to pay off all your existing debts at once. Now you just have one monthly payment to manage.

A debt consolidation loan can also save you money, if the interest rate on the loan is lower than the rates on your current borrowing.

What’s the catch, then? You often need a good score to get approved for lower rates and larger loans. Also remember that if your loan has a long repayment term, you could end up paying more overall, as you’ll be paying interest for longer.

Debt consolidation also only works if you’re disciplined. For example, if you use a loan to pay off credit cards, your debt can grow if you spend on your cards again before you clear the loan. Then you’re left with more debt than you started with, which is not what you want.

credit expert

Our credit expert says…

A short-term dip in your score is normal when you take out a debt consolidation loan. What matters more is your long-term plan for paying down debt and building a healthier credit score. If debt consolidation is right for you, it should help you get back on track. John Webb, Experian UK

Does transferring credit card balances affect your credit score?

Yes, transferring credit card balances can affect your score. Some people move their credit card debt to a balance transfer card so they pay little or no interest for a set time. Here are a few ways this can affect your score:

• Application — Any credit application leaves a mark on your credit report for around 12 months. If you apply for a balance transfer card, your score will dip slightly when you apply. But it should quickly recover if you manage the account well.
• Credit utilisation — This is how much of your available credit you’re using, with all your credit limits added up. Using less of your available credit — ideally under 30% — is good for your credit score. Because a new card increases your available credit, this can improve your score.
• Cancelling old cards — If you cancel credit cards after transferring the balance, your total available credit will fall. This can lower your credit score. Though it may be worth closing cards anyway, for example if it will help protect you from getting into more debt.
• Payments — Transferring credit card balances may lead to a better credit score if it helps you make payments on time and pay off credit card debt faster.

Do money transfers affect your credit score?

Not directly. A money transfer from a bank account won’t affect your score. Transferring money from a credit card to a bank account won’t appear on your credit report either — but if the transfer increases your credit card debt, that can impact your score.

Applying for a money transfer card will affect your score, as applying for any credit leaves a hard search on your report. Help protect your score by paying back the transfer amount as soon as you can and avoiding more credit applications for a while.

Should I get a debt consolidation loan if it will hurt my credit score?

Debt consolidation may be worth some short-term changes to your score if it helps you pay off debt, lower the cost of interest and improve your credit health in the long run. Remember, your credit score reflects how lenders see you. They should view you in a more positive light if you build a history of on-time payments and lower your debt. Your score will go up to reflect this.

Debt consolidation doesn’t suit everyone and comes with risks — for example, your debt can grow if you spend on accounts again after paying them off. StepChange offers free, unbiased advice on debt consolidation.

If debt consolidation is right for you, find your best offers with Experian. Searching loans is free, takes less than two minutes and won’t affect your credit score.

Plus, some lenders work with Experian to use ReFi™ technology. If you take out a debt consolidation loan with ReFi™, your existing debts will be paid off directly for you. This can help with the loan application, because the debts you’d be paying off may not be seen as your ongoing repayments during affordability checks.

We’re a credit broker, not a lender.

Alternatives to a debt consolidation loan

Here are a few options to consider if a debt consolidation loan isn’t right for you:

• Balance transfer card — Transferring card balances may help you group debt in one place and lower the cost of interest for a while. Try to pay it off before the 0% period ends and you’re put on a higher rate.
• Avalanche method — This is a debt repayment method where you pay off debt with the highest rates first, helping you lower the overall cost of interest.
• Negotiate with lenders — If you’re struggling to make payments, lenders may agree to new terms, like a debt management plan.
• Get temporary protection — Lenders can’t add interest or take legal action against you while you have Breathing Space , which often lasts for up to 60 days.
• Look for financial support — Citizens Advice explains how to get help with the cost of living. You may be able to find a grant using National Debtline ’s list of charities.

Can I get debt relief without hurting my credit?

Most debt relief options lower your score at first. But they can improve your credit over time by helping you repay lenders. It’s important to choose an option that supports your financial health in the long run.

A debt relief order (DRO) can write off some or all of your debt. It stays on your report for six years. Your score drops when it’s first recorded but should start recovering once the DRO is marked as ‘discharged’ after about 12 months. It should keep improving as the record ages. If there were specific reasons for your debt — like a long illness or a job loss — adding a Notice of Correction to your report can explain this to lenders.

If you need more support with debts

If you’re struggling with debt, support is available to help you understand your options and make a plan to move forward:

• GOV.UK explains common options for dealing with debt.
• Citizens Advice has guides on budgeting, benefits and creating a debt plan.
• National Debtline and StepChange offer free, confidential debt advice.

Frequently asked questions

How does debt consolidation affect your credit?

Debt consolidation often lowers your credit score at first but can improve it in the long run. Consolidating your debts may be the right move for your credit health if it helps you make payments on time, repay lenders faster and lower the cost of interest.

Is a balance transfer good for my credit score?

Transferring credit card balances won’t directly impact your score. But your score may improve over time if a balance transfer helps you pay off debt. Just know that your score will dip for a while when you apply for a balance transfer card.

If I consolidate my debt, will it affect my credit score?

Yes. Your credit score dips when you apply for a debt consolidation loan. But your score should improve in the long run if debt consolidation helps you make payments on time and clear debt.

Do debt relief companies hurt your credit?

Debt relief usually lowers your credit score to begin with. But if debt relief is right for you, it should improve your credit health in the long-term by helping you clear debts you’d otherwise struggle to repay.

Get free, independent debt advice before choosing a debt relief company. There are plenty of organisations that will help you for free, so it’s not something you need to pay for. Be wary of any companies saying they can write off debt using a legal loophole.

Will I lose my credit cards if I consolidate my debt?

No, it’s your choice whether to cancel your cards after paying them off. Cancelling them can be a good way to stop yourself getting into debt again. Your score may dip when you close them, but should go up again over time if you manage your remaining accounts well.