Do debt consolidation loans impact your credit score?

Wondering how a debt consolidation loan could affect your credit score? We’ll break it down for you.

Consolidating your debts can affect your credit score. But the good news is, it should only be in the short-term. This is because it adds a hard inquiry to your credit file, which will show for around 12 months. If you pay back your consolidation loan responsibly, and show lenders you can make repayments on time, it should only take a temporary hit. In this article we'll cover how it works and how it might help you.

Debt consolidation sounds complicated but it's pretty simple. It works by paying off all your existing debts with either a new loan, or a balance transfer credit card. So, instead of having several different repayments to make each month, you’d only have one monthly repayment to make.

It can help those who struggle to make multiple repayments and make clearing the overall debt feel more manageable.

But, consolidating debt can come with risks that you need to be aware of.

Take time to compare the borrowing options available to you and work out which one is best suited to your circumstances.

Be aware that a debt consolidation loan could end up costing you more overall. For example, if you get a loan with a longer term, you could end up paying back more in interest.

If you’re applying for a debt consolidation loan or another form of credit, always read the terms and conditions of the agreement before applying.

So, how does debt consolidation affect my credit score?

Ways it can help your credit score

Paying your debt back regularly and on time can help show lenders you’re borrowing responsibly and building up your payment history. It can show you’re managing a diverse range of credit and over time which can help boost your score.

Ways it can have a negative impact on your credit score

Applying for a debt consolidation loan means a hard search will appear on your credit file. This can negatively affect your credit score – especially if you’ve had several hard credit searches in a short amount of time. A hard credit search will appear on your credit report for around 2 years but will only impact your score for around 12 months. Usually a hard search will knock a few points off your credit score.

Ways to consolidate your debts

There are a two common options if you want to consolidate your debts, including:

Personal loans

When you take out a personal loan to consolidate your debts, it’s known as a debt consolidation loan. Before you apply for this type of loan, make sure you are eligible and compare the different interest rates available to you.

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Balance transfer credit cards

A balance transfer credit card allows you to transfer existing credit card debt onto another card with a lower or 0% interest rate. You’ll need to meet certain criteria to be eligible for a balance transfer credit card, and there may be fees to take into account. Make sure you can afford to repay any money you borrow. You may have to pay a fee if you miss a repayment, which can also harm your credit score and your ability to borrow in the future.

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Debt consolidation FAQs

Is it worth getting a loan to consolidate debt?

If you’re able to pay off high-interest debts with a personal loan that has a better interest rate, then it could be worth it. However, just be aware that you may end up paying more in interest overall.

Having only one payment to make each month could make your debt repayments feel more manageable. But you’ll need to meet the new payments to avoid going into further debt.

It’s also worth checking the terms and conditions of your existing debt, as there may be an early repayment fee.

How hard is it to get a debt consolidation loan?

How successful your debt consolidation loan application is, will depend on several factors, including your credit score.

Lenders will assess your current credit score and decide how risky it is to lend to you. You may have a better chance of getting a debt consolidation loan if you have a good credit score.

Do debt consolidation loans impact your credit score?

Key takeaways:

Will consolidating my debts affect my credit score?

Debt consolidation explained

So, how does debt consolidation affect my credit score?

Ways it can help your credit score

Ways it can have a negative impact on your credit score

Ways to consolidate your debts

Personal loans

Balance transfer credit cards

Debt consolidation FAQs

Is it worth getting a loan to consolidate debt?

How hard is it to get a debt consolidation loan?

Can I put all my debts into one?

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