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Debt Consolidation: Will it Hurt Your Credit?


Your debt is starting to feel unmanageable. You can’t continue to juggle minimum payments and carry balances that don’t seem to go down. Something has to give.

If you’re researching options for debt relief, you’ll likely come across two popular terms: Debt Management Plan and Debt Consolidation Loan. How do they work? How will they affect your credit?

Not to worry. As a non-profit credit counseling agency, we get these questions all the time. That’s why we’ve rounded up what you should know when it comes to different types of debt consolidation and your credit right here.

What is a Debt Management Plan?

A Debt Management Plan (DMP) is a type of debt consolidation offered by non-profit credit counseling agencies. A DMP enables you to consolidate multiple unsecured debts into one monthly payment to the agency, who then distributes payments to each of your creditors on your behalf.

Let’s say you have six credit cards that you’re making six different monthly payments on. Through a DMP, you’ll only need to make a single affordable monthly payment until your balances are paid off. In exchange for enrolling in a DMP, creditors may grant benefits including lower interest rates and waive late or over-the-limit fees, which help you pay off your debt faster.

What is a Debt Consolidation Loan?

Debt Consolidation Loans are generally offered by banks and other financial institutions. Since it’s a loan, you’re replacing multiple accrued debts with one single loan. The interest rates may be fixed or variable, and in order for it to be a more manageable monthly payment, the repayment period may be longer.

To get approved for a Debt Consolidation Loan, lenders will consider factors such as your credit score and income to determine the terms of your loan. Unlike a DMP, this option will not prevent you from accumulating more debt (similar to credit card balance transfers) so it’s advised that you proceed cautiously to not end up deeper in debt in the long run.

How Will this Impact My Credit?

First, it’s important to understand the key factors that make up your FICO scores. Your FICO Scores are calculated based on five categories with varying levels of importance:

  1. Timely Payment History – 35%
  2. Amounts Owed to Creditors – 30%
  3. Credit History Including Age of Each Account – 15%
  4. Mix of Credit Cards, Retail Accounts, Mortgage Loans, Etc. – 10%
  5. New Credit Opened in Short Period of Time – 10%
debt consolidation and credit score


Whether you opt for a Debt Management Plan or a Debt Consolidation Loan, both are designed to help you repay your debts and if you make timely payments, this will be reflected positively in your credit report over time.

However, right after you choose an option to consolidate debt, your accounts will likely be closed and your available credit will decrease. This may result in a temporary credit score drop. But by closing accounts, you’re able to pay down debt without accumulating more, which will eventually help you pay it off faster.

You see, while there may be a temporary setback, in the long run you will have a positive impact on some of the key factors that affect your credit score.

Debt Management Plan and Your Credit

It’s important to note that if you get help from a credit counseling agency and enroll in a DMP, the agency does not report to the credit bureaus. In fact, an agency cannot make any representation about any aspect of your credit record, credit score, credit history, or credit rating.

On the other hand, your creditors may report that you are on a DMP and the notation “CC” (Credit Counseling) may appear beside your accounts on your report. Once you complete the program, creditors typically remove that notation and you can gradually improve your credit score.

Depending on the circumstances, your credit can be enhanced in the long run, have a temporary setback, or not be altered at all.

Debt Consolidation Loan and Your Credit

If you decide to get a Debt Consolidation Loan, you’ll essentially be shifting your debts. Let’s say you have $10,000 in credit card debt to five different creditors. All of those balances to the individual creditors would be paid but you’d still have $10,000 in debt in the form of a new loan. In most cases, the creditors you’re paying off with your consolidation loan must be closed.

This will affect your credit mix and you won’t have credit available at all, which can have a negative impact on your credit score. Some of these accounts may have been open for years and that is considered in the credit history factor and your open debt consolidation loan will be the newest active item on your report.

What Do I Do Next?

Think of it this way, staying in debt making minimum payments or missing a payment will most certainly have a negative impact on your credit score. Debt is not just going to go away on its own. You’ll need to commit to a plan that will work for you and take action.

Remember, you don’t have to do this alone. If you have questions, comment below or speak with a certified credit counselor for free by calling 866-484-5373. We hope you feel empowered to take the next step towards relief from your debt.


6 Responses to Debt Consolidation: Will it Hurt Your Credit?

  1. Alice says:

    I had a problem with my phone. New number Tuesday or Wednesday. Will call you then

    • Tracy East says:

      Hi Alice – Our customer care team has forwarded your request to your counselor. Please let us know if there is anything else we can do for you!

  2. David Mumbo Jr says:

    Thank you. Can you consolidate debt on collections appearing on your credit report if theyre not credit card based ?

    • Tracy East says:

      Hi David – the best way to tell what specific debts can be included in your consolidation would be to speak with one of our certified counselors so that they can advise you on your individual creditors.

  3. Mattie H. Flipping says:

    I am interested in talking with you about the different services you have to offer. My home phone number is 706-790-9803.

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