Debt consolidation can both help and hurt your credit score, but fortunately, the overall effect is mostly within your control. If you successfully pay off your debt and don’t accumulate excessive balances in the future, the impact should be positive. Conversely, your score will go down if you practice undisciplined spending habits or miss payments.

Knowledge is power when it comes to protecting your credit. It’s important to understand the relationship between debt consolidation and credit score, so you can make moves today that help you regain control of your finances.

Key considerations

Debt consolidation will likely have a positive long-term effect on your credit if you remain a responsible and disciplined borrower; however, you’ll probably notice a decline in your credit score in the short term.
To prevent a big dip, make on-time payments and stick to a budget to ensure you don’t accumulate more debt by spending too much.
Minimize the impact of debt consolidation by keeping your other accounts open and avoiding opening any new cards or loans in the near term.

What is debt consolidation?

Debt consolidation is when you combine multiple unsecured debts into a single loan, usually at a lower interest rate. When used to consolidate credit card debt, for example, you might put several card balances with varying annual percentage rates (APRs) into a single loan with a fixed monthly payment.

To pay off debt, you have the following debt consolidation options:

Apply for a debt consolidation loan
Leverage a balance transfer credit card during its promotional period
Consider a debt management plan with a credit counseling agency

Generally speaking, debt consolidation is a good idea if your new interest rates are lower than those on your existing accounts so you can save more money over time; a good or excellent credit score helps with this. Regardless of the method you choose, consolidating debt may change your credit score.

Can debt consolidation improve your credit score?

Here are a few ways you may improve your credit score after debt consolidation:

Creates a history of on-time payments: Building credit is a long-term strategy, and your score may slowly rise if you make payments on your consolidation loan on time over the course of several years. The longer your track record, the better, as payment history accounts for 35% of your overall FICO score.
Decreases credit utilization ratio: Consolidating revolving credit debt (like credit card debt) through an installment credit (like a debt consolidation loan) decreases your credit utilization ratio. Reporting agencies generally favor those who limit the amount of credit they’re using to less than 30% of their total available credit, but lower ratios are even better.
Adds to your credit mix: Adding a different type of credit product helps diversify your profile. Bureaus generally like to see a combination of credit types, like credit cards, loans, and mortgages, when determining your score.

How can debt consolidation hurt your credit? 

While consolidating debt may have long-term benefits, debt consolidation can hurt your credit score:

Hard inquiry on a new account: Applications for new credit accounts impact your credit score because opening a new account requires a hard credit inquiry. This can decrease your score for a short time, especially if you don’t have a long credit history.
Risk of accumulating more debt: You may be tempted to spend again once your card balances are resolved. If you don’t stick to responsible habits, you could rack up more debt and increase what you owe. How much you owe (ratio of your credit card balances to your credit limits) has a large impact on your score, about 30%, according to FICO.
Potential for missed payments: Just like with credit cards, it remains your responsibility to keep track of payment due dates on your consolidation loan. Any missed or late payments will result in a dip. Consolidating to one monthly payment makes it easier to manage.
Old account closure: The old card company may close the card for you after consolidating debt because your usage has gone dormant. If you don't have other long-standing accounts, this will decrease the average age of your accounts and impact your score.

How to protect your credit when consolidating debt

When you understand the impact of debt consolidation and its potential effect on your credit score, you can take proactive measures to safeguard it.

Prequalify: Prioritize lenders that offer quick online prequalification so you can check for loan offers and compare lenders before prompting a hard credit inquiry. In general, for debt consolidation to make sense, ensure that the APR on your new loan is lower than the ones on your existing accounts.
Keep your accounts open, but use them sparingly: If possible, keep your accounts active to maintain a payment history. Only use your cards for purchases that you can afford to pay off each month, so you don’t add to your debt.
Pause on any new applications: Multiple attempts to open a new credit account in a short period of time is a warning sign to lenders. Once you have a debt consolidation plan in place, hold off on applying for any new products until you make it through a few payment cycles.
Enroll in autopay: Once you consolidate debt, enroll in autopay so you don’t forget to pay the bill for your new loan on time.
Stick to a budget: Create a budget to help manage your spending and make payments.

FYI: BHG Financial offers debt consolidation loans with repayment terms up to 10 years,^1,2 helping you keep monthly payments low, so you can stay within budget.

Does debt consolidation hurt your credit FAQ

How long will debt consolidation affect my credit?

Debt consolidation loans trigger a hard credit inquiry, which when performed, causes your score to dip temporarily. However, building a history of on-time payments using the new loan could help improve your score over time.

Is debt consolidation or debt settlement better for my credit?

Debt consolidation usually has a better, more positive long-term impact on your credit, as long as you keep up with the payments and don’t close your accounts. Debt settlement—negotiating with creditors to pay less than what you owe—can cause significant damage to your score due to withholding payments and the impact of settlement on your credit report. Settled accounts will remain on your report for seven years.

Can consolidating debt lower my credit utilization ratio?

If you consolidate your debt through a loan, you will lower your utilization ratio because you will have paid off your high-balance cards with funds from the loan. For this to have a positive impact on your score, you’ll need to keep your utilization ratio low and avoid accumulating excessive high-interest debt in the future.

Will applying for debt consolidation trigger a hard credit inquiry?

Some lenders perform a hard credit inquiry during the application process, while others allow you to prequalify using a soft credit inquiry. BHG Financial doesn’t perform a hard credit pull for personal loan applications until the funding stage of the loan process. This means that submitting an application will have no impact on your credit score.³

BHG supports your financial health, every step of the way

At BHG Financial, we believe financing should fit seamlessly into your life and goals. That’s why we offer personal loans tailored to your needs, with amounts up to $200,000¹ and flexible terms of up to 10 years.^1,2 Consolidate your high-interest debt with a BHG loan designed to help you move forward confidently.

Plus, you’ll enjoy dedicated, U.S.-based concierge service that works around your schedule—because your time is valuable. Ready to see what’s possible? Use our quick and easy payment estimator to get your personalized loan estimate in just seconds.

Not all solutions, loan amounts, rates or terms are available in all states

*The savings estimate assumes a fixed-monthly payment is made on the variable APR credit card and no additional draws on the line are made for the 7-year period.

**BHG monthly payment based on BHG’s minimum available APR for a 7-year term, which is 12.44% as of 4/01/25 and includes an origination fee. Your actual loan size, loan term, and monthly payment amount may vary based on your individual credit profile and other information provided in your loan application. Terms subject to credit approval.

¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile.

² Personal Loan Repayment Example: A $59,755 personal loan with a 7-year term and an APR of 17.2% would require 84 monthly payments of $1,228.

³ There is no impact on your credit for applying. For personal loans, a complete credit history, which will appear as an inquiry on your credit report, will be performed upon acceptance and funding of the loan and may impact your credit.

Annual percentage rates (APRs) for BHG Financial personal loans range from 11.96% to 27.87%, with terms from 3 to 10 years.

Consumer loans funded by Pinnacle Bank, a Tennessee bank, or County Bank. Equal Housing Lenders.

No application fees, commitment, or impact on personal credit to estimate your payment.

For California Residents: BHG Financial loans made or arranged pursuant to a California Financing Law license - Number 603G493