The dip and the climb
A consolidation loan touches your credit at four moments. Only one of them tends to pull your score down, and it is temporary.
No effectRate checkA soft inquiry. It doesn't affect your score.
Small dipYou acceptA hard inquiry and a new account can lower your score slightly for a while.
Often helpsCards paid offYour card balances drop, so you use less of your available credit.
BuildsEvery paymentEach on-time payment adds to your payment history.
What pulls your score down, and what lifts it
Can lower it
- A hard inquiry when you accept the loan.
- A new account, which lowers the average age of your accounts.
- Closing the cards you paid off, which reduces your available credit.
- A missed payment on the new loan. This does the most damage.
Can raise it
- Lower card balances. You use a smaller share of your credit limits.
- On-time payments, month after month.
- A mix of credit types. An installment loan alongside cards.
The items on the left are mostly one-off and small. The items on the right keep working for as long as you keep paying. That is why the usual shape is a dip followed by a climb.
How to protect your score when you consolidate
- Check rates with a soft inquiry. Use lenders that prequalify you without a hard credit check, and only proceed with the one you choose.
- Pay off the cards straight away. When the loan arrives, use it for the balances it was meant for.
- Leave the cards open, and leave them alone. Open cards with a zero balance help your utilization. New spending on them undoes the point of consolidating.
- Never miss the loan payment. Set a reminder or automatic payment for a few days before the due date.
See your rate without a hard credit checkChecking uses a soft inquiry. A hard inquiry may be made only if you accept an offer.
Check my rateHow other options compare
A consolidation loan that you repay on time is one of the gentler options for your credit. Two others are worth knowing about.
- Debt management plan. Arranged through a nonprofit credit counseling agency. You may have to close the cards in the plan, which can lower your score at first.
- Debt settlement. Negotiating to pay less than you owe. It typically involves missed payments along the way and harms your credit considerably.
New to the idea altogether? Start with what debt consolidation is.