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Consolidating high-interest credit card debt at a lower interest rate can save you hundreds or even thousands of dollars. But if you’re considering this strategy, you’ve probably wondered, does debt consolidation hurt your credit — or help it?

Let’s look at how different approaches to debt consolidation might affect your credit score and some best practices for protecting your credit.

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3 ways debt consolidation helps your credit score

A debt consolidation loan can help your credit score in three ways:

  1. Reducing the overall amount of debt you owe, assuming you don’t go out and run up more debt on your credit cards
  2. Lowering your credit utilization ratio, which is the percentage of your available credit limit you’re accessing on each card
  3. Improving your credit mix if you don’t already have an installment loan (like a car loan), adding a personal loan to your credit mix and establishing a history of repayment can boost your credit score

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3 ways debt consolidation can hurt your credit

As we’ve seen above, paying off credit card debt with a personal loan can give your credit score an immediate boost and also has long-term benefits. But there are some pitfalls to avoid when consolidating credit card debt.

Getting a debt consolidation loan can hurt your credit score if you:

  1. Take out more new debt than you’re paying off, which will increase the amount owed when calculating your FICO score
  2. Open several new credit accounts in a short period of time, which will increase the amount of new credit and decrease average account age
  3. Default on any of your loans, creating an adverse payment history on your credit report
Example: A recent academic study by researchers at the Georgia Tech Scheller College of Business found that borrowers taking out personal loans to pay off credit card debt saw their credit scores increase almost immediately, by an average of 21 points. Many also saw their credit card limits increased.

But within a few months, it was not unusual for borrowers to start racking up new debt on their credit cards. After two years, the group studied had higher average debt levels than when they started and were at a higher risk of default.

What makes up your credit score

The chart below shows how much weight is given to each of the factors that determine your FICO score.

Different approaches to debt consolidation

Now that you understand the factors that go into calculating your FICO score, let’s look at the pros and cons of different approaches to debt consolidation in terms of protecting your credit score.

Personal loan

Taking out a personal loan to get out of debt can save you money and boost your credit score.

Pros

  • Reduces your total debt, if you’re disciplined about not running up new debt on your credit cards
  • Lowers your credit utilization ratio on one or more credit card accounts
  • Improves your credit mix if you don’t have an installment loan on your credit report

Cons

  • Increases the number of accounts with balances if you continue to use your credit cards
  • Increases the total amount owed on one specific type of account (installment)
  • Late or missed payments can hurt credit score

Balance transfer card

If you’ve got good credit, chances are your mailbox is crammed with 0% APR offers from credit card companies. Minimum payments can be less than monthly payments on personal loans if you’re willing to stretch your payments out over many years, but remember that that can result in higher total interest charges.

Pros

  • Can reduce your total debt, if you pay off balances on your other credit cards
  • Lower minimum monthly payment means less risk of late payments

Cons

  • Increased credit utilization ratio might hurt credit score

Home equity loan

Because it’s an installment loan, a home equity loan will have much the same effect on your credit score as a personal loan.

Pros

  • Improves your credit mix if you don’t already have an installment loan on your credit report

Cons

  • Increases the total amount owed on one specific type of account (installment)

HELOC

Because it’s revolving debt, opening up a HELOC to consolidate debt is more like using a balance transfer card than taking out a personal loan.

Pros

  • Can reduce your total debt, if you pay off your other credit card balances

Cons

  • Increased credit utilization ratio might hurt credit score

5 tips for protecting your credit when consolidating debt

Here are five debt management tips that can help you protect your credit when consolidating debt.

  1. Choose a loan with manageable monthly payments: If you’re taking out a personal loan to pay off credit card debt, picking a loan with easy to manage monthly payments can help you stay on track, as well as not taking on a new loan or more credit card debt that could make it hard to keep up with your payments.
  2. Get your balances below 30% of your limit: To benefit from a lower credit utilization ratio, you don’t have to pay off your entire balance. In some cases, a low credit utilization ratio can even be more beneficial for your FICO scores than not using any of your available credit.
  3. Consider keeping credit cards open: Even if you’re able to pay off the entire balance, closing credit card accounts that you’ve had for a long time can shorten your average account age and ding your credit score. If you’re not paying an annual fee, you might just want to keep those accounts open.
  4. Boost your credit score by taking out a personal loan: If you don’t have an installment loan like a car loan or a mortgage on your credit report, taking out a personal loan for debt consolidation can improve your credit mix.
  5. Don’t open too many accounts at once: Borrowers who open several new credit accounts in a short period of time might see their credit scores drop because they’re viewed as being at greater risk of getting behind on their payments.