Consolidating Your Debts: Will It Boost or Damage Your Credit Rating?

American households are drowning in debt. With roughly $18 trillion in total debt floating around—including a staggering $1.17 trillion tied to credit cards alone—many people are looking for ways out. If you’re juggling multiple debts, consolidation might seem like the answer. But here’s the thing: while debt consolidation can definitely improve your financial situation, it’s not a magic wand. It can actually hurt your credit score in some scenarios, even as it helps in others.

Understanding What Debt Consolidation Actually Does

At its core, consolidation of debt means merging multiple obligations into a single loan or credit vehicle. Picture this: you’ve got five credit card balances and a personal loan hanging over your head. Instead of managing five different payments, you’d take out one consolidation loan—or tap into a home equity option if you own property—then use that money to wipe out everything else. Boom. One payment, one lender, one monthly bill.

The appeal is obvious. If that new loan carries a lower interest rate (and with credit card rates hovering above 21%, it probably will), your monthly payments shrink. That freed-up cash each month? It can either reduce your financial stress or go toward paying down the principal faster.

The Credit Score Upside: How Consolidation Can Help

Here’s where things look promising. Your credit utilization—the amount of debt you’re actually carrying—makes up 30% of your credit score. As you pay down those consolidated balances more aggressively, your score should climb steadily over time.

The math works like this: with a lower interest rate, more of each payment goes toward the actual debt instead of interest charges. That means faster payoff and quicker credit score recovery. Beyond that, consolidation of debt reduces your risk of missed payments. Since you’re juggling fewer bills, staying on top of payments becomes easier. And payment history? That’s 35% of your score—so avoiding late payments is huge for your credit rating.

The Credit Score Downside: Short-Term Damage You Should Expect

But let’s not sugarcoat it. Applying for a consolidation loan triggers a hard inquiry into your credit report, and that immediately dings your score. Most credit bureaus estimate the drop at less than five points, and things usually rebound within a few months if you handle the new account responsibly.

The real problem emerges if you close old credit card accounts after consolidating. Why? Two major factors influence your score: account age (15% of the calculation) and credit mix variety (10%). Shutting down long-standing accounts—especially if you’ve had them for years—can temporarily lower your score. You’re essentially erasing history and reducing the diversity of your credit profile.

Making Consolidation Work: How to Avoid Pitfalls

If you’re going down this road, don’t just grab the first consolidation option you see. Compare everything: dedicated consolidation loans, personal loans, home equity products, or even balance transfer cards if the rates are competitive. Different lenders offer wildly different terms. Shop around aggressively. The difference between a smart choice and a bad one can easily amount to thousands of dollars over the life of the loan.

The key is ensuring that your consolidation strategy actually reduces what you’re paying overall. If the new rate isn’t significantly lower, or if you end up extending your repayment timeline, you might actually pay more in interest despite having a simpler payment schedule. That defeats the purpose entirely.