Here’s a situation many, many Americans have found themselves in: Wanting to get rid of debt without obliterating their credit scores in the process. As of 2020, the average credit score in America was 711, which falls in the “good” range. However, everyone’s situation is different — and even those with already decent credit can benefit from boosting their score, as can consumers struggling with average or poor credit.
Sometimes there’s simply no choice — like if you’re in so much debt that settlement or bankruptcy makes the most sense given the amount of debt in question.
However, sometimes consolidation is an option for moderate debt before you need to resort to a strategy capable of dragging down your credit score for years to come. In fact, some consolidation approaches can actually help you raise your credit score over time, which puts you in a stronger position next time you need to apply for financing or housing.
How does credit card consolidation without hurting credit work? Here’s more on some possible ways to consolidate that usually don’t hurt, and may even help, your credit score.
How Can Consolidation Hurt Your Credit Score?
Whether you go the route of a consolidation loan, a balance-transfer credit card or a home equity loan, there are a few common reasons why your credit score might take a hit in the aftermath. The good news is that this dip is often a short-term occurrence and tends to have less effect than the positive aspects of consolidation.
According to Bankrate, there are two major reasons why consolidation might impact your credit score for the worse:
- Lenders perform a “hard inquiry” to check your credit. This can lower your score by 10 points or so, but only affects your score for a year or less.
- The average age of your accounts could drop. In terms of credit account age, older is better in the eyes of lenders. Closing accounts, particularly old ones, can make your average “younger,” which is one of the factors used to tabulate your credit score.
Of course, first and foremost, the effect of consolidation on your credit score depends primarily on you committing to paying down your debt reliably. Payment history makes up nearly one-third of your score. When you compare that to credit age (about 10 percent) you can see how significant of an effect consistent payment has on your credit outcomes. Missing loan payments, for example, can seriously hurt your score. Setting up autopay and budgeting to afford on-time payments over the course of a few years, on the other hand, can help you build a strong track record capable of bolstering your score.
How Can Consolidation Help Your Credit Score?
There are a few ways in which consolidation can help you improve your credit score, too.
- Streamlining with a loan can make it less likely you’ll miss a payment, allowing you to build up a consistent track record over time.
- Taking on a debt consolidation loan (in addition to credit cards) can diversify your credit mix, which accounts for about 10 percent of your score.
- Paying off your credit card debts can reduce your percentage of available credit in use, optimizing your credit utilization ratio. For instance, if your credit cards were maxed out or nearly so, using a loan to pay off most or all of those balances can help your score in this way.
Doing credit card consolidation without hurting your credit score is, above all, a matter of committing to making timely payments and keeping an eye on your utilization ratio. Furthermore, although consolidation does require a hard inquiry to gain lender approval, keeping old accounts open is one way to avoid potential negative effects on your score.