How Long Does Debt Consolidation Stay on Your Credit Report?

How Long Does Debt Consolidation Stay on Your Credit Report?

Debt consolidation itself doesn’t appear on your credit report. That said, since consolidating debt typically involves using a new loan or credit card to pay off your balances, the new account will appear on your report.

Exactly how long that account remains on your reports will depend on the type of credit, as well as how you manage your debt payoff plan.

Balance Transfer Credit Card: Up to 10 Years or Indefinitely

A balance transfer credit card is a type of card that comes with an introductory 0% annual percentage rate (APR) promotion, allowing you to take a break from paying interest for up to 21 months while you repay your balance.

If you keep the card open after you pay down your balance, the account will remain on your credit reports indefinitely. If you always pay your bill on time and close the account in good standing, that positive information will stay on your reports for 10 years from the date the card was closed. However, if you missed a payment by 30 days or more, that negative mark will last for seven years from the original delinquency date, or the date the account first became past due.

Personal Loan: Up to 10 Years

A personal loan is another popular debt consolidation tool. While it won’t give you a 0% APR, it does provide a fixed repayment term, which can be helpful if you’ve struggled to stay disciplined with your debt payoff plan. Also, if you have good or excellent credit, you may be able to secure a lower interest rate than what you’re currently paying.

Unlike credit cards, there’s no way to keep a personal loan account open indefinitely. But if you make all your payments on time, the account will remain on your credit reports for 10 years after it’s closed. If you miss a payment or stop repaying your loan, that negative information will stay on your credit reports for seven years from the original delinquency date.

Other Debt Consolidation Options: Up to 10 Years

Depending on your situation, you may consider other ways to consolidate your debt, such as a home equity loan, home equity line of credit (HELOC) or 401(k) loan:

• Home equity loans: A home equity loan can have repayment terms of up to 30 years, but in terms of your credit report, they work similarly to personal loans: Positive information remains on your credit reports for 10 years after account closure, while negative information stays for seven years from the original delinquency date.
• HELOC: While HELOCs function similarly to credit cards in many ways, they generally can’t be kept open indefinitely; repayment terms usually range from 10 to 30 years. In other words, the same rules apply with positive and negative account information.
• 401(k) loan: Unlike other consolidation options, 401(k) loans don’t show up on your credit reports at all because you’re essentially borrowing money from yourself.

Learn more >> Can You Consolidate Debt Without Hurting Your Credit Score?

How Does Debt Consolidation Affect Your Credit?

Depending on which type of financial product you choose to consolidate your debt, the process can impact you in different ways. Here’s a quick summary of the factors that come into play.

Payment History

Regardless of which option you choose—excluding 401(k) loans—making your payments on time will help improve your credit score.

If you miss a payment by 30 days or more, however, it could have a significant negative impact on your score. The longer you go without catching up on a missed payment, the more damage it’ll do.

Credit Utilization Rate

With a credit card, your credit utilization rate is the percentage of available credit you’re using at a given time on revolving credit such as credit cards. If you consolidate a credit card balance with a personal loan, home equity loan, HELOC or 401(k) loan, that’ll drop your utilization rate on that card down to 0%, which can improve your credit—especially if your utilization was high to begin with.

If you use a balance transfer credit card, however, the impact will depend on the credit limit of the new account. If transferring the debt results in a lower utilization rate than what you had on the original card, it could improve your credit score. If it’s higher, it could hurt your credit until you pay it down.

Length of Credit History

Each time you open a new credit account, it reduces the average age of all of your credit accounts, which is a factor in your credit scores. As a result, your credit score may experience a temporary dip, though it can rebound as your average age of accounts increases again. Just be careful to avoid opening loans and credit cards too often.

New Credit

Applying for credit frequently can be an indicator of risk for lenders. Also, each time you apply for credit, the lender will run a hard inquiry on your credit reports. One new inquiry won’t have much of an impact on your credit score, and inquiries only affect your score for the first 12 months.

But if you apply for multiple loans or credit cards in a short period, those inquiries can have a compounding negative effect on your credit unless you’re rate shopping for certain types of loans.

Credit Mix

Credit mix is a factor in your credit score that looks at the different types of credit accounts you have. There are two types of credit to know about: installment credit and revolving credit.

Installment credit provides you with a set amount of money in one lump sum. You repay the balance in set payments over time. Once the balance is repaid, the account is considered closed. A common example of installment credit is a personal loan.

Revolving credit, on the other hand, gives you access to a credit limit that you can borrow against, repay and borrow again continuously. A common example of revolving credit is a credit card.

Here’s how credit mix comes into play when you consolidate debt. If all of your debt is currently only in revolving credit accounts (for example, if you have only credit card balances), then consolidating your debts using a debt consolidation loan or another type of installment credit could diversify your credit mix. And, conversely, if you currently have exclusively personal loans or other installment debt, then consolidating through a balance transfer card could also improve your credit mix.

Keep in mind that credit mix has a modest impact on your credit compared to major factors such as your payment history. But, over time, a more diverse credit mix could help you grow your score.

Learn more >> What Affects Your Credit Scores?

How to Minimize the Impact of Debt Consolidation

Using debt consolidation to improve your financial situation can also have a positive impact on your credit score over time.

But if you’re not careful, certain aspects of the process could do more harm than good. Here are some tips to help you minimize the potential negative impact of debt consolidation on your credit score:

1. Keep old credit cards open. If you’re consolidating credit card debt, you may be tempted to close the old accounts once the process is complete. But closing credit cards can negatively impact your credit. Unless keeping the account would be costly—for example, the card has an annual fee, or you’d be tempted to rack up more debt—avoid closing it.
2. Avoid adding more debt. After you pay off a credit card balance, avoid adding more debt that you can’t afford to pay off in full each month. Otherwise, it can slow your progress toward becoming debt-free.
3. Avoid applying for too many accounts. This can help keep the negative impact of credit inquiries and new credit accounts to a minimum.
4. Always pay on time. Your payment history is the most influential factor in your credit scores, so it’s crucial that you always pay your bills on time. Before you apply for a loan or credit card, make sure the new monthly payment comfortably fits in your budget and set up automatic payments or monthly reminders to pay manually.

Can You Remove Debt Consolidation From Your Credit Report?

No, you cannot remove debt consolidation from your credit report.

First, keep in mind that consolidation itself doesn’t appear on your credit report. But, consolidation can have impacts on your credit. If you open a new credit account to consolidate your debts, that new account—and how you manage it—will appear on your credit report.

As long as the information recorded on your credit reports is accurate, then it belongs there and cannot be removed. On the other hand, you have the right to dispute information on your credit report you believe to be inaccurate.

Learn more >> Understanding Your Experian Credit Report

Alternatives to Debt Consolidation

Debt consolidation can be a smart way to get on top of what you owe, simplify your payments and save on interest. That said, it isn’t a one-size-fits-all solution. Depending on your goals, finances and your credit, one of these options may be a good alternative.

DIY Repayment Methods

If a more structured repayment plan is what you need, you could consider using the debt snowball or debt avalanche method. Each method has you prioritize and attack your debts based on either interest rate or balance. That could help you gain momentum or even save money as you work to get out of debt.

Debt Management Plan

A debt management plan (DMP) is a service offered through nonprofit credit counseling agencies. Unlike consolidation, it doesn’t involve applying for new credit. Instead, your credit counselor negotiates your debts with your creditors, and you make one, streamlined payment to the counselor each month until your debt is paid.

A DMP could be a better alternative to consolidation if you are deeply in debt, or if your payments are posing a hardship and you need extra support.

Bankruptcy

Bankruptcy is a legal process that can provide relief if you’re unable to repay your debts, though should only be used as a last resort. If you qualify, bankruptcy may allow you to eliminate some or all of your debt.

There are two main types of bankruptcy: Chapter 7 and Chapter 13. Each one has its own restrictions for who qualifies based on income and assets, and they also differ in how they prioritize discharging your debts.

Bankruptcy is very damaging to your credit. Chapter 13 bankruptcy appears on your credit report for seven years, and Chapter 7 bankruptcy drops off your report after 10 years. Either one can stand in the way of borrowing down the line.

Before you file for bankruptcy, you’ll be required to meet with a court-approved credit counselor for a pre-bankruptcy counseling session. The counselor will evaluate your financial situation and your debts to determine whether you qualify to file for bankruptcy.

Learn more >> How to Get Out of Debt

Check Your Credit Before You Apply for Consolidation

Most of the best consolidation options require good or excellent credit to get approved or to enjoy favorable terms. So, it’s a good idea to check your credit score before you apply for new credit. If your credit needs some work, you may consider other debt repayment strategies while you work on improving your credit.