How can debt consolidation hurt my credit score?
While there's a definite upside to the ease of a single payment and the temptation of a lower interest rate, consolidation can hurt your credit score in a few ways. But some simple strategies can help minimize the impact.
- New credit inquiries: Each time you apply for a loan or a credit card, you'll incur a hard inquiry on your credit report. Since credit score inquiries and new accounts contribute to roughly 10% of your credit score,1 several inquiries and new credit accounts in a short period can lead to a drop. To minimize the impact, check your credit score2 in advance, so you can confirm with the lender or card issuer that your credit score is sufficient for the loan or credit card you want. And then apply for just one loan or card for your debt consolidation.
- Increased credit utilization: If you use a new loan or credit card to consolidate and then close the credit lines you've rolled into the new debt, you could decrease your available credit and thereby increase your credit utilization. A better choice: Instead of closing credit cards, cut up those that you've moved your debt out of. That way, you won't be tempted to use them, but they're still in your name and contributing to your overall available credit.
- Lower age of credit: New accounts can lower the average age of your credit accounts. Credit history length accounts for roughly 15% of your overall credit score. This is another reason why keeping unused credit card accounts open after consolidation is so important.
What are some predatory consolidation practices to watch out for?
Be cautious of companies that charge a monthly fee to "manage" your debt and negotiate with your creditors. Any service that a so-called debt consolidation company can offer you (lowering your payments or negotiating a payoff) is also accessible directly by you. All you have to do is reach out to your creditors and start the conversation. While it might take a bit of back and forth, you might find you can get a lower interest rate or even an attractive balance transfer offer just by calling.
Debt consolidation can help you achieve a lower monthly payment and a lower interest rate for all your existing debt. And you don't have to pay a fee to anyone to help you do this.