Does debt consolidation affect your credit score?

Depending on your individual actions, debt consolidation can have a positive or negative impact on your credit score. Taking out a new form of finance may temporarily lower your score, but keeping up with your new repayment and decreasing your overall debt utilisation can improve it over time. 

6 min read
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What is debt consolidation? 

Debt consolidation is the process of merging multiple debts into one manageable monthly repayment. Depending on your eligibility, you may be able to secure a debt consolidation loan with a lower interest rate or longer loan term (with lower repayments) than your existing debts. However, you might pay back more in interest overall. 

What are the different types of debt consolidation? 

There are three main ways to consolidate debts: 

•    Move your existing credit card balances onto a low or 0% interest rate balance transfer credit card
•    Take out a debt consolidation loan and use it to repay your existing debts
•    Remortgage your home with additional borrowing and use these funds to pay off your debts

How do credit scores work? 

A credit score is a number used by lenders to estimate what kind of borrower you are and how much risk is associated with lending to you. 

There are three main credit reference agencies in the UK – Equifax, Experian, and TransUnion – and each of these uses different data points and calculations to create your score. 

While several different things can affect your score, as a rule of thumb, borrowing responsibly and making your repayments on time will improve your credit score. In contrast, a high rate of credit utilisation (meaning you are using all or a significant portion of the total credit available to you) and missing payments will negatively affect your score. 

Does debt consolidation affect your credit score?

Debt consolidation can affect your credit score in many ways. If you choose to take out a new debt consolidation loan, this will appear on your credit report just like any other type of finance. Lenders will be able to see when you took out the loan, its amount, and whether you make your repayments in full and on time. 

Your credit report will also show any of your existing debts that have decreased or been closed as you use the debt consolidation loan to pay them off. This could help to demonstrate that you are a responsible borrower. 

Any missed payments – whether they apply to your existing loans or your debt consolidation loan – can stay on your credit report for up to six years.

Does debt consolidation hurt your credit? 

When you apply for a debt consolidation loan, a hard search will be carried out on your credit report. This hard search, combined with the new debt being added to your report, can negatively affect your credit score temporarily.

However, your score should bounce back once you use the loan to clear your other debts and start making loan repayments. In contrast, missed or late repayments could damage your score further. 

If you’re using a debt consolidation loan to pay off credit card debts, consider whether it might be worth keeping your accounts active once the balance has been paid off. Closing unused cards can decrease the average age of your credit and increase your credit utilisation rate (as you have less unused credit available).

While this may negatively affect your credit score, also consider whether keeping the cleared credit accounts active is worth the risk of using them and falling deeper into debt.

Hard and soft credit searches

There are two main types of credit search: hard and soft. 

•    Soft credit searches – these are used to give an initial assessment of your credit eligibility. They will not usually be visible to other lenders and should not affect your credit score. 

•    Hard credit searches – these are a more in-depth search on your credit report performed by lenders when make an application for credit. These are visible to other lenders and may stay on your credit report for up to 12 months. Too many hard searches in a short period of time can cause lenders to worry that you are relying on credit and could be a higher risk borrower.

Will a debt consolidation loan improve my credit score? 

While taking out a debt consolidation loan won’t necessarily improve your credit score on its own, the way you use and manage it could benefit your financial situation. 

If you’ve been struggling with debt for some time, it’s understandable that you may have missed payments or made some repayments late. These missed payments might have left you with a less-than-perfect score that limits your chance of being accepted for a loan. 

Successfully managing a debt consolidation loan shows lenders that you can handle a long-term financial commitment and that you can be a reliable borrower, as well as reducing your total credit utilisation as you use the loan to pay off your existing debts. 

Can I consolidate debt without affecting my credit score? 

Whether you choose to take out a debt consolidation loan or open a new balance transfer credit card, any form of finance that you use to repay your existing debts may affect your credit score. 

If you’re looking to pay down your existing debt without harming your credit score, there are steps you could take that don’t include applying for a new form of finance. These include: 

•    Using any available cash savings to pay off your debts

•    Implementing a new household budget to increase the amount you’re able to repay each month 

•    Paying down your debt in priority order (highest-interest rates first) to make the remaining payments more manageable

If you’re struggling with debt, you can access free financial advice and support from a professional debt specialist. Visit Money Wellness, StepChange, Citizens Advice, National Debtline, or Money Helper to find out more. 

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Intelligent Lending Ltd is credit broker, working with a panel of lenders. Homeowner loans are secured against your home.

Disclaimer: All information and links are correct at the time of publishing.

Verity Hogan, Personal Finance Writer

Verity Hogan

Personal Finance Writer

Verity is a personal finance writer and journalist with over 13 years of experience working in a variety of industries, including 3 years specialising in motoring and debt. She contributes engaging, informative guides on everything you need to know on debt consolidation and car finance for Ocean.