How Does Debt Consolidation Hurt Your Credit?

Understand the risks and pitfalls first

A woman works out how to consolidate her debt at her coffee table.

JGI/Jamie Grill / Getty Images

If your credit card bills are piling up and you just can’t juggle any more, a balance-transfer card or loan can consolidate your debt, but doing so may also have a lasting impact on your credit. 

While combining your outstanding balances can simplify repayment, reduce stress, and most importantly, save you money on interest over time, this approach can ding your credit score and history if you’re not careful. 

Learn how debt consolidation can hurt your credit.

Hard Inquiries Ding Your Credit Report 

When you apply for a new credit account to consolidate debt, the lender will check your credit, leading to a so-called hard inquiry on your credit report. Each hard inquiry can temporarily lower your credit score by up to five points because lenders look at new credit applications as a sign of risk. 

To avoid a big hit, only apply for a loan or balance transfer card you can qualify for. Don’t apply for new accounts left and right and cross your fingers for approval. Multiple hard inquiries created by a credit card or personal loan application in a short period of time will definitely hurt. While those inquiries will only impact your credit score for a year, the records will linger on your credit history for two years, which could be a red flag to future lenders. 


Check your credit score before applying and take note of how your score is categorized: Is it considered fair, good, or excellent? Use that information to guide your loan or credit card selection.

On the plus side, if you are consolidating debt, you likely won’t (and shouldn’t) open another new line of credit any time soon, so a temporary dip in your credit score may not matter.  

New Accounts Lower Your Average Credit Age 

Opening a new credit card or taking out a loan for debt consolidation will lower the average age of all your credit accounts, which may also temporarily lower your credit score. 

The length of your credit history makes up 15% of your FICO credit score and specifically factors in the age of your newest account. A brand new account doesn’t yet have a positive credit history, so your score will benefit as you make on-time payments and the account ages.


While some situations can’t be avoided, the next three definitely can be. Pay close attention so you know what not to do after consolidating your debt to keep your credit score on the up and up. 

Racking Up More Debt After Consolidation Raises Utilization Ratio

One of the biggest risks associated with consolidation is running up new debt before you’ve paid off your old balance. If you succumb to the spending temptation of a newly paid off credit card, any credit score improvements you see will quickly disappear. 

Here’s why: When you consolidate your debt into a new account to pay off other cards, your overall amount of available credit increases, lowering your credit utilization ratio. The lower that ratio is, the better your FICO credit score will be. (It accounts for 30% of your score.)

But, if you don’t leave those credit limits alone on your older cards, you’ll get yourself in trouble again. Here’s an example of how piling new debt on top of consolidated debt will increase your credit utilization ratio and be a drag on your score: 

Card and Credit Limit Balance After Debt Consolidation Balance After Debt Consolidation + New Debt
Card No. 1: $2,000 limit $0 $500
Card No. 2: $3,000 limit $0 $1,200
Card No. 3: $5,000 limit $0 $2000
Card No. 4: $15,000 limit (balance transfer card used for consolidation) $7,000 $7,000
Credit Utilization Ratio: 28% 43%


Rein in your spending habits, or you’ll be juggling multiple debts again, including a large consolidated debt account. This could soon overwhelm your budget and lead to late payments, or worse—default. 

Closing Old Credit Cards Reduces Available Credit

If you’ve been spooked by the previous warning, don’t go too far to restrain your spending. That is, don’t go as far as to close those old, balance-free credit cards. That will actually hurt your credit score too.  

By keeping the cards open and paid off, you will reduce that oh-so important credit utilization ratio we just discussed, positively impacting your credit score while you pay down your consolidated debt. Close the cards and your credit score will take a hit.

Here’s an example of how closing unused credit cards could raise your credit utilization ratio, using the same four card scenarios: 

Card and Credit Limit Balance After Debt Consolidation Balance After Debt Consolidation + Closing Cards
Card No. 1: $2,000 limit $0 N/A
Card No. 2: $3,000 limit $0 N/A
Card No. 3: $5,000 limit $0 N/A
Card No. 4: $15,000 limit (balance transfer card used for consolidation) $7,000 $7,000
Credit Utilization Ratio: 28% 47%

See how those empty cards can work in your favor while you pay off that balance transfer card? So instead of closing unused cards, tuck them away while you pay down the consolidated debt balance. If you’re likely to buckle, lock the physical cards in a safe, or freeze them in water. Make sure you remove all automatic payments from those cards and clear saved card details from any online shopping accounts to eliminate further temptation. 


If overspending is a serious concern and your budget is already under pressure, closing empty cards may be in your best interest after all. Your score may dip temporarily, but you can more easily bounce back from that kind of a hit than from more suffocating debt. Just make sure to close cards with caution

Being Late or Missing Payments Clouds Credit History

It’s absolutely crucial that you make all your debt consolidation payments on time each month until the balance is repaid. Payment history has the biggest influence on your FICO score, and records of late payments will damage it.

If you ignore the debt consolidation balance and stop making payments altogether, your account will become delinquent and the lender will send it to collections. Collection records stay on your credit report for seven years and until that time passes, your credit will suffer immensely. 

If you are suddenly facing financial difficulties and worried you’ll miss a consolidated debt payment, call your credit card or loan issuer before your payment becomes late and your credit score takes a hit. There may be financial hardship options available. 

The Bottom Line

If you make consistent, on-time payments and don’t incur any new debt, consolidating existing debt into a single, low interest account, whether it’s a balance-transfer credit card or loan, can make the burden more manageable and lower your credit utilization ratio. Any short-term negative impacts on your credit score will fade with time. And smart use of your credit down the road will boost your credit score in the long run—and help you avoid another situation where you’ll need to consolidate your debt.

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  1. myFICO. "What's in my FICO Scores?"

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