How Debt Consolidation Affects Your Credit Score

Debt consolidation can be a powerful tool for simplifying payments and reducing interest—but many homeowners worry about the impact on their credit score. The truth? It's complicated, but generally positive over time.

The Short-Term Impact (First 1-3 Months)

When you consolidate debt, your credit score may temporarily dip by 5-20 points. Here's why:

Hard Credit Inquiry

Applying for a consolidation loan or HELOC triggers a hard inquiry, which typically costs 5-10 points. This impact fades within 12 months.

New Account Opening

Opening a new credit account lowers your average account age, which makes up 15% of your FICO score.

Credit Utilization Shift

If you're using a HELOC or personal loan, your revolving utilization drops (good), but you've added installment debt (neutral).

The Long-Term Benefits (6+ Months)

Here's where consolidation shines:

Lower Credit Utilization

If you consolidate $20,000 in credit card debt into a HELOC, your credit card utilization drops to 0%. Since utilization is 30% of your score, this can boost your score by 50-100 points.

Payment History Improvement

One payment is easier to manage than five. On-time payments build positive history (35% of your score).

Debt-to-Income Ratio

While not part of your FICO score, a better DTI helps with future loan approvals.

Consolidation Method Comparison

Strategies to Protect Your Credit

1. Don't Close Old Cards

After paying off cards, keep them open. Closing accounts hurts your credit utilization ratio and average account age.

2. Time Your Application

Apply for consolidation when you have no other recent hard inquiries. Multiple inquiries in 45 days for the same loan type count as one.

3. Keep Making Minimum Payments

Until your consolidation loan funds and pays off balances, continue making all minimum payments to avoid late marks.

4. Monitor Your Credit

Check your credit reports at AnnualCreditReport.com to ensure paid accounts are reported correctly.

Real Example: Sarah's Credit Journey

Sarah had $35,000 in credit card debt across four cards, with a 680 credit score.

Before Consolidation:

• Credit utilization: 78%
• Payment history: 2 late payments
• Credit score: 680

After HELOC Consolidation (12 months):

• Credit utilization: 8% (kept cards open)
• Payment history: 12 consecutive on-time payments
• Credit score: 742

Her score increased 62 points because lower utilization and consistent payments outweighed the initial hard inquiry.

When Consolidation Hurts Credit

Consolidation can backfire if you:

• Run up new balances on paid-off cards
• Miss payments on the consolidation loan
• Close all old accounts immediately
• Take on more debt before the consolidation settles

The Bottom Line

For most homeowners, debt consolidation temporarily dips your credit score but significantly improves it within 6-12 months—especially if you're consolidating high-interest credit card debt.

The key is choosing the right consolidation method and maintaining good habits afterward.

Ready to Explore Your Options?

If you have home equity, a HELOC often offers the lowest rates for debt consolidation. See if you qualify or start your pre-qualification to explore your options.