Is Consolidating Credit Cards Bad for Your Credit

A proven means of dealing with outsized credit obligations, consolidating debt can streamline the repayment of multiple commitments by combining them into one, lowering the overall interest rate and sometimes shortening the amount of time you'll need to pay them in full.

Accomplished successfully, this can have a positive effect on your credit score. However, the very act of applying for a consolidation will lower your score temporarily because every hard inquiry into your credit history does so.

Moreover, when it comes to whether or not consolidating credit cards is bad for your credit overall, there are some other considerations as well.

Let's take a look at them.

Credit Card Consolidation Methods
There are a number of different approaches to debt consolidation, each with a slightly different set of requirements — and a different effect on your credit score. These include credit card balance transfers, personal loans, home equity lines of credit, 401(k) loans and debt management plans.

Credit Card Balance Transfers
Among the advantages of credit card balance transfers are a period of zero percent interest accrual, flexible payments and no prepayment penalties. On the other hand, your credit score will take a dip because your credit utilization will increase.

This is also risky because if the introductory period expires before you pay off the transferred amount, you'll be faced with making interest payments on the entire transferred amount, going all the way back to the date the transfer was executed.

Personal Loans
This form of credit card consolidation can be had with a lower credit score than a balance transfer. You'll typically pay a lower interest rate as well. Additionally, moving your credit card debts to an installment loan could lower your credit utilization rate, as well as improve your mix of credit accounts. Both of those acts will improve your credit score.

On the other hand, late payments will ding your score; you could also encounter high fees and prepayment penalties.

Home Equity Instruments
A straight home equity loan will be reported as an installment agreement. A line of credit will be reported as a revolving account. You'll also have to endure a credit check, which can have a detrimental effect on your score.

The biggest problem here though is trading unsecured debt for secured debt. With credit card debt, you can walk away with little more than a blemish on your credit report and the concomitant score drop if it turns out you can't pay. Meanwhile the secured home equity loan will require you to liquidate the property, which means you could lose your home.

401(k)
Borrowing against your retirement account generally requires no credit check, nor does it appear on your credit report — so it has no effect on your credit score.

Debt Management
While the act of working with a credit counselor has no effect on your score, the mechanics of a debt management plan can be detrimental. After all, your counselor will work out deals with your creditors to forgive fees and some of the interest you owe. You'll also be required to close certain accounts to participate in the plan. All of these actions detract from your credit score.

Furthermore, the debt management plan will be listed on your credit report while you're working through it, which will cause some lenders to think twice before approving a loan.

There's one more thing to consider when determining whether consolidating credit cards is bad for your credit.

Each of these consolidation methods — save debt management — will zero out the balances of all of your participating credit card accounts. A handful of credit cards with no balances can be a powerful temptation to resist. However, you'll almost certainly make your problem much worse than it already is if you don't.

On the other hand, a successfully completed credit card consolidation will improve your credit score.