How does debt consolidation affect your credit score?

Debt consolidation can both hurt and help your credit score depending on the stage. Initially, applying for a consolidation loan triggers a hard inquiry, which can temporarily lower your score by a few points. If you open a new account, it also reduces your average account age, another small negative factor. Over time, however, consolidation typically improves your score. Combining multiple debts into one lowers your credit utilization ratio, especially if you're paying off credit cards. Making consistent on-time payments on the new loan builds positive payment history, which is the biggest factor in your score. The net effect is usually positive within several months, provided you avoid running up new balances on the accounts you just paid off.