How Long Does a Debt Consolidation Loan Stay on Your Credit Report?

Credit reports from the three major credit bureaus don’t include a specific section on debt consolidation, but a debt consolidation loan can affect your credit score in both temporary and lasting ways.  

Keep reading to learn how debt consolidation loans could affect your credit score, and what you can do to limit the impact. 

What is debt consolidation?

Debt consolidation involves bundling several outstanding debts together into one new loan to pay them off. Ideally, the monthly installment payments for the new loan will be lower than the total amount of payments on the debts being consolidated. People often take out debt consolidation loans to pay off higher-interest credit card debts. 

How does debt consolidation affect your credit score? 

Your credit score is calculated with information from your credit report. Your credit report contains a record of your credit applications, loan approvals, payment activity, and more. Here are some of the ways taking out a debt consolidation loan could affect your credit score: 

• Hard credit checks: When you apply for a debt consolidation product like a personal loan, the application triggers what’s called a hard credit inquiry. A hard inquiry means the lender pulls your full credit file to review your credit history. Hard inquiries typically lower your score by a few points, but the effect is usually temporary. 

• New credit: Adding any kind of new credit account and increasing the amount that you could owe to creditors can impact your credit score.  

• Payment history: Your payment history is the largest component of your credit score. Lenders report on-time, late and missing loan payments to the major credit bureaus. 

• Credit mix: Credit bureaus keep track of how many types of credit you have. Taking out a debt consolidation loan could increase your credit mix. 

• Credit utilization: Your credit utilization ratio measures how much of your revolving credit limit you’re using at a given time. Paying off a credit card and closing a credit card can both affect your credit utilization ratio.  

  

How to limit the impact of debt consolidation on your credit score 

Opening any new credit account can lower your credit score, but the way you manage your debt consolidation loan may offset that effect over time.  

It’s important to make debt consolidation payments on time, every time. Negative information submitted to the credit bureaus can stay on your credit report for several years. Late payments and loan defaults are examples of negative credit information. Late payments and defaults can remain on your credit report for up to seven years. 

 

Another way to limit the impact of taking out a debt consolidation loan is to keep your old accounts open, if possible. Having a mix of revolving credit, such as credit cards, and installment credit, such as a debt consolidation loan, can raise your credit score.

Keeping old credit cards active also raises the average age of your accounts, which is good for your credit score. Open accounts in good standing stay on your credit report indefinitely, even if you rarely use them. Closed accounts with a zero balance due are also listed as accounts in good standing, but they only stay on your credit report for up to 10 years. When they roll off your credit report, it can reduce the average age of your accounts, which can lower your credit score. Closing the account can also negatively affect your credit mix.  

If you leave a credit card open, however, it’s important not to use it, or if you do, pay it off right away. If you start accumulating a balance again, you could raise your credit utilization rate and bring down your credit score. 

The bottom line 

Consolidating debt doesn’t have to have a significant impact on your credit score when you first do it, but making your monthly loan payments on time will. Your credit score should improve over time, provided you don’t accumulate and mismanage new debt while making those loan payments. Closed accounts could also impact your credit score, so it might be a good idea to leave those accounts open even if they have a zero balance.     

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