How does debt consolidation affect your credit score?

Depending on how you manage your debt consolidation, your credit score may improve or decrease. Debt consolidation is when you take out a loan to pay off multiple other loans. Usually, borrowers consolidate their debt by taking out a personal loan or using a balance transfer credit card. 

Debt consolidation can affect your credit score positively if:

1. The balance transfer card has a higher credit limit. This lowers your credit utilization rate which immediately affects your credit score. 
2. You make payments on time. Since you are paying off all or several of your debts with the debt consolidation plan, it may be easier to make one consistent on-time payment which can help boost your score considerably. Additionally, your debts reduce and you can better manage your finances. 
3. You don’t take on more debt. As you repay your current credit card debt, avoid adding on more debt. This will only take you back to where you started. 

Debt consolidation can also negatively affect your credit score if you use a balance transfer card with a lower credit limit. The loan you take out for consolidation results in a hard inquiry and a new credit account, both of which can lower your credit score, at least temporarily. 

In the long run, debt consolidation can help you improve your credit score provided factors like on-time payments are managed well.