Credit score: What is debt consolidation and what are its pros and cons?

livemint.com:

credit score. Lower credit utilisation ratio: If you use a debt consolidation loan to pay off multiple debts, such as credit cards, your overall credit utilisation ratio may decrease. This ratio represents the amount of credit you're using compared to your total available credit.

A lower credit utilisation ratio can positively impact your credit score. Fewer accounts: Consolidating multiple debts into one loan can reduce the number of accounts with outstanding balances, which can be viewed favourably by credit scoring models. Hard inquiry: When you apply for a debt consolidation loan, the lender may perform a hard inquiry on your credit report.

While one inquiry typically has a minimal impact on your credit score, multiple inquiries within a short period can lower your score slightly. New credit account: Opening a new credit account for debt consolidation can temporarily reduce the average age of your credit accounts, which may have a small negative impact on your credit score. ALSO READ: Exhausting credit card limit? This could affect your credit score – here's how Overall, debt consolidation can help improve your credit score if you manage it responsibly by making payments on time and reducing your overall debt burden.

However, it's essential to carefully consider the terms of the consolidation loan and ensure that you can afford the payments before proceeding. It leads to fewer accounts as multiple loans are converted into one loan, which is viewed favourably by the credit scoring model. Debt consolidation can have both positive and negative effects on your credit score, based on how you manage the same.