Does debt consolidation affect your credit score?

Debt consolidation affects your credit score and can have either a positive or negative impact. This depends on how you go about applying for debt consolidation, how you go about repaying your debts and what your credit score was to begin with, among other factors.

6 min read
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Ways debt consolidation can help your credit score 

Debt consolidation can affect your credit score positively if you go about it the right way. Following these principles will help improve your credit score.

1. Paying back the debt sooner

Finding a better deal with a lower interest rate than you’re currently paying might mean you’re able to pay back your debt over a shorter period of time. This will improve your credit score quicker because you’ll be out of debt sooner.

2. Lowering your credit utilisation ratio

Your credit card utilisation ratio is the amount of credit you’re currently using compared to how much credit is available to you. This number is usually given as a percentage. The lower it is, the higher your credit score will be – an ideal ratio is 30% or under (meaning you spend 30% or less of your total credit limits on your credit cards and overdrafts put together).

If debt consolidation reduces the amount of revolving debt you have in total (i.e. on credit cards and overdrafts – not instalment loans), then your credit utilisation will also go down. This should help to boost your credit score.

3. Improving your credit mix

Your credit mix consists of the different types of credit you hold. Having a combination of revolving credit (such as over drafts and credit cards) and instalment loans could boost your score. This is because lenders can see that you’re capable of managing different types of credit.

However, if you have multiple accounts open with large debts and/or you’re struggling to meet payments, creditors might think that you’re not a responsible borrower.

4. Always paying on time

Once you’ve consolidated your debt, you’ll have a payment schedule that you’ll need to stick to. Paying on time and in full every month will improve your credit score because it’ll show lenders that you’re able to manage credit responsibly.

Ways debt consolidation can hurt your credit 

Taking out a debt consolidation loan or balance transfer credit card can seriously damage your credit score if you don’t go about it in the right way. Make sure you avoid these mistakes to protect your credit score.

1. Making lots of credit applications at once

Every time you make a credit application a footprint is left on your credit history. It’s nothing to worry about if your applications are few and far between, but if you make lots of credit applications within a short space of time, you risk damaging your credit score.

Instead, use an eligibility checker. This tool lets you see whether you’re likely to be accepted for a particular line of credit before you apply – with no impact to your credit score. Unlike a formal a credit application, it doesn’t leave a footprint for lenders to see.

2. Opening a new line of borrowing

Opening a new credit account lowers your credit score temporarily. This is because the lender conducts a hard search of your credit history that leaves a footprint on your account.

Bear in mind that older credit accounts with a good payment history can improve your credit score as they age (as long as you make your payments on time and in full). Therefore, opening a new account with a lower credit age can damage your credit score. You can’t avoid this if you want to consolidate your credit. However, you can avoid taking out credit very often to avoid your credit score being seriously damaged.

3. Overextending yourself financially

Overextension is where you take out credit which is larger than you can afford to pay back. Overextending yourself financially will mean you can’t afford to meet the minimum repayments on your debt and in turn, this will damage your credit score. You can avoid overextension by only taking out credit you can afford to pay back.

4. Falling behind on your repayments

While meeting your repayments on time and in full can improve your credit score, not doing so will have the opposite effect. Not only will it show lenders that you struggle to manage credit responsibly, you also risk incurring late fines and even legal action if you stop making payments altogether.

When applying for debt consolidation make sure you take out a payment plan that’s realistic for your finances.

If your situation changes and you’re no longer able to make your repayments, speak to your provider to see if you can alter your repayment plan – just be aware that it’ll take longer to pay your debt off if you do this. You can also seek free confidential debt advice from StepChange.

Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.

How much does debt consolidation affect your credit score? 

How much debt consolidation will affect your credit score depends on your individual circumstances and financial history. There are several factors that need to be taken into consideration, including:

  • how good your current credit score is to begin with – having a lower credit score means you may be impacted more
  • how many applications for credit you’ve made in a short space of time – making lots of applications lowers your credit score
  • if your new repayment plan means you’ll pay the debt back sooner, then your credit score will improve – but a longer repayment plan could impact it negatively
  • if you make all of your repayments on time it will boost your credit score - but not doing so will damage it

How long does debt consolidation stay on your credit report? 

As with any line of credit, a debt consolidation loan will stay on your credit report for six years. If you stuck to your repayment plan and successfully paid off the loan, this isn’t something you should worry about because future lenders will see that you’re responsible with credit.

If you defaulted on your loan or frequently missed payments your credit score will have been damaged and you’ll need to work hard to rebuild it.

What credit score do you need for a debt consolidation loan? 

The credit score you need for a debt consolidation loan depends on which loan you’re interested in applying for. Having a high credit score will mean you’ll be accepted by more lenders and will have easier access to lower interest rates. A low credit score will make it more difficult for you to find a good deal.

Can I get a debt consolidation loan with bad credit? 

As mentioned above, you may find it more difficult to get a debt consolidation loan if you have a low credit score. But don’t worry, there are financial companies out there who specialise in lending to people with a thin or poor credit history. You should shop around to find the best deal available to you.

Or if time isn’t an issue, you could work on building your credit score and apply for a better deal in the future.

How can I increase my credit score? 

There are several ways in which you can increase your credit score. See our top 10 tips for boosting your credit score below:

  1. put bills in your name – just make sure you always pay them on time or this could have the opposite affect
  2. consider getting a card designed for those with poor credit, such as a credit builder card
  3. make your repayments on time and in full
  4. create a budget to help you manager your finances more easily
  5. set payment reminders for your repayments
  6. set up direct debits so you don’t miss any repayments
  7. reduce your debt by making repayments and not taking out any more credit
  8. register to vote – a quick and easy way to improve your credit score
  9. don’t make multiple credit applications
  10. regularly monitor your credit report and fix any errors quickly

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