How does debt consolidation affect my credit score?

A debt consolidation loan can be a good way to make managing your money easier by rolling your existing borrowing into one simple monthly payment. Ideally, a debt consolidation loan gives you a lower rate of interest resulting in lower monthly repayments or allowing you to pay off your debt sooner. Here we look at how a debt consolidation loan could also help you improve your credit rating.


Can a debt consolidation loan improve my credit rating?

Over time and depending on a number of factors, yes it can. To achieve this, it is important that you remain disciplined about all aspects of your finances, in particular making all your loan repayments on time and in full and ensuring you are not increasing your overall debt or using all of your available credit. You will need to consider the size and type of your original debt or whether there are any hidden or extra fees to clear your existing debts.

Improve your payment history

One of the biggest factors in calculating your credit score is your history of paying back loans and other credit. Paying back a debt consolidation loan on time will build a history of regular monthly repayments, which may help to improve your credit score over time.

Reduce the likelihood of missing a payment

Missed payments negatively impact your credit score. A debt consolidation loan simplifies your existing borrowing into a single monthly payment, which can be lower than the combined total of your individual loans before consolidation. Having fewer repayments to think about, and a lower monthly payment figure, means you should be less likely to miss a repayment. This will play a part in building your credit score.

Lower credit utilisation

‘Credit utilisation’ is a calculation of how much credit you are using out of the revolving credit you have available to you. ‘Revolving credit’ is a form of borrowing where the amount borrowed, the repayments and duration are not fixed, such as overdrafts and credit cards. For example, if you have a credit limit of £1,000 on your credit card but have a balance of £200 on the card, your credit utilisation would be 20%.

Credit utilisation is another factor that helps determine your credit score. Keeping a low level of credit utilisation across your borrowing could help improve your credit rating. Paying off credit card and/or overdraft debt with a debt consolidation loan reduces your credit utilisation and therefore could help improve your credit score.

A good mixture of 'revolving credit' and 'instalment credit' (like a personal loan) is usually recommended to maintain a good credit score. This mixture is known as a 'credit mix'.


Does a debt consolidation loan hurt my credit score?

When you consolidate debt using a loan you could initially see a drop in your credit score because you are opening a new line of credit. This is usually temporary if all other things remain equal. You should see your credit score gradually improve over time as a result of consolidating your debt – this is because you are making a regular and structured repayment each month.

You'll need to make sure that you are keeping on top of the other things that influence your credit rating e.g. making repayments in full and on time. As mentioned earlier, maintaining a good "credit mix" typically helps when building your credit score.

When applying for a debt consolidation loan check your eligibility before applying. Some lenders, including RateSetter, conduct a soft credit check when you apply for a loan quote, which is a type of credit check that does not show up on your credit file, and so does not impact your credit score.


If you have existing credit cards and/or personal loans, you could consolidate your existing borrowing with a RateSetter loan:

New to RateSetter? A RateSetter personal loan can be used to streamline your existing borrowing into one affordable monthly payment. It could also save you money every month in interest. Find out more

Already have a RateSetter loan? You may be eligible to consolidate your existing borrowing with your current RateSetter loan or take out a new loan. Sign in to your account to get a personalised rate.


If you’re worried about debt, you might find it useful to visit The Money Advice Service which has further information about debt management and offers free debt advice.