How a Debt Consolidation Loan Impacts Your FICO® Scores
Find out how credit card debt consolidation loans can affect your FICO® Scores by closely examining the potential impact on each scoring category.
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Consolidating your credit card debt with a personal loan can offer several benefits. Moving high interest rate credit card debt to a lower rate personal loan can save you money and might lower your monthly payment. And you'll have fewer bills to manage each month.
Some loan issuers also highlight how consolidating credit card debt can increase your credit scores. But using a personal loan to pay down or off credit card debts can affect your FICO® Scores in both positive and negative ways.
Here's a closer look at how this credit card payoff strategy might affect your FICO® Scores based on the five FICO Score categories. But remember, as always, the exact score changes you experience will also depend on your current credit profile.
Payment history — could help or hurt your score
Your payment history is the most important scoring category, and consolidating your credit card debt presents an opportunity, but not a guarantee, to improve your FICO® Scores.
It all comes down to whether you make your payments on time. Consolidation might help by lowering your monthly payment amount and leaving you with fewer bills each month, making managing your bills easier.
However, even if you use the loan's proceeds to pay off the credit card balances in full, be sure to keep an eye on your credit card accounts. Residual interest might accrue, or you might have forgotten about automatic payments that you set up on the card. You don't want to accidentally miss a credit card payment and wind up having to pay fees or hurting your FICO® Scores.
Amount of debt — could help or hurt your score
The amount of debt category can impact about a third of a FICO® Score, making it another major part of your score. However, predicting the effect of credit card consolidation can be difficult because the category includes multiple scoring factors.
For example, you will now have a new loan that you haven't made any payments on, and the high balance to loan amount might hurt your score. However, paying off multiple credit cards and having fewer accounts with balances could improve your score.
One of the most important factors within this category is your credit utilization ratio, and paying down credit card balances with an installment loan can lower your utilization ratio. As a result, many people could experience a FICO® Score improvement. However, to keep the improvement, you'll have to avoid accumulating credit card debt again.
Length of credit history — could initially hurt your score
Taking out a new loan might initially hurt your FICO® Scores because the new account will lower the average age of your credit accounts and you'll have a brand-new account in your report. But, over time, the loan might help your score as it ages as long as you make on-time payments.
You might also decide to close your credit cards after you pay them off. Keeping your cards open might be a better option because it can make maintaining a low utilization rate easier. However, closing cards might be a better financial decision if the cards have annual fees or you tend to overspend with credit cards.
But you don't need to worry about how closing the cards impacts length of credit history. Generally, FICO® Scores continue to consider closed credit cards (and other accounts) in the length of credit history calculations. And when you pay off a loan or close a credit card that's in good standing, the account can stay in your reports for 10 years.
Credit mix — could help your score
A debt consolidation loan might help your FICO® Scores' credit mix, because if you don't already have an installment loan, you are adding a new type of loan to your credit mix– the debt consolidation installment loan.
The credit mix category only accounts for about 10% of your FICO® Scores, but even a small improvement can sometimes be meaningful. Remember, though, if you're also paying off another installment account, such as a mortgage, auto, student or personal loan, the new debt consolidation loan might not affect your credit mix at all.
New credit — could initially hurt your score
FICO® Scores also consider how many new accounts you have, how long it's been since you opened an account, and your recent hard inquiries. As with your credit mix, these won't necessarily have a major impact on your FICO Scores, but the new account could hurt your score.
Unlike with mortgage, auto and student loans, FICO® Scores don't deduplicate multiple hard inquiries for personal loans. As a result, rate shopping for personal loans could result in several hard inquiries that lower your score.
However, many lenders offer preapprovals with a soft credit inquiry, which won't affect your FICO® Scores. The preapprovals can show you estimated loan amounts and terms, and gathering preapprovals from several lenders could be a good way to rate shop without hurting your score.
Is consolidating credit card debt with a loan a good idea?
Consolidating credit card debt might be a good idea if you qualify for a low-rate personal loan. But also consider other consolidation options, such as balance transfer credit cards, and review how each option will impact your financial situation and debt payoff plan.
If you think using a personal loan will be the best option, know that your FICO® Score could also affect your loan offers. You can check your FICO Score from FICO for free — you don't have to share any payment information — and get free credit report monitoring with your account.
Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.