Debt Consolidation Often Results in Higher Credit Scores and Better Credit Performance

Participation in the consumer lending market is at a record high, with more than 19.6 million consumers carrying an unsecured personal loan through the first half of 2019. Consumer adoption of personal loans for debt consolidation has driven much of this growth, as consumers with heavy credit card debt often receive offers to consolidate their debt via a personal loan. However, the increased prevalence of consolidation loans has led to the rising misconception that this practice may lead to a debt trap for consumers.

TransUnion (NYSE: TRU) released findings today at Money 20/20 USA from their recent study exploring how debt consolidation loans impact consumer credit performance, overall debt load and credit health. The study found that many consumers benefit from accepting these offers –and perform better on those products – over the long-term.

“We are seeing a shift in consumer credit preferences toward streamlining bills into a single monthly payment. Personal loans offer a predictable payment plan with set terms and fixed rates,” said Liz Pagel, senior vice president and consumer lending business leader at TransUnion. “Consumers with credit card debt often have to juggle multiple payments on several cards. Not only does debt consolidation make paying bills more simple, but more importantly it often results in a credit score boost for some individuals.”

The study found that, on average, consumers who take on a debt consolidation loan pay down just over 58% of their credit card debt with the new personal loan, bringing average credit card balances down from $14,015 to $5,855. Over 60% of consumers who consolidated their credit card debt saw their balances decline by 60% or more from pre-consolidation levels. The resulting drop in credit line utilization, among other factors, led to a boost in credit scores for the majority of consumers who employed a debt consolidation loan.

Following consolidation, 68% of consumers saw their credit scores improve by more than 20 points. Score migrations were consistent across all risk tiers, but most notably the prime and below risk tiers possessed the greatest percentage of consumers with improved credit scores. While the initial score boosts were apparent after just one quarter, the results were not short-lived. Score improvements persisted a year later (albeit at lower levels).

Debt Consolidation Drove Score Improvements Across All Risk Tiers

Score Migration BOP to EOP +3 months	Segment	Subprime		Near Prime		Prime		Prime Plus		Super Prime
Improved(+20 pts. or more)	Control	35	%	22	%	18	%	13	%	1	%
Improved(+20 pts. or more)	Debt Consolidators	84	%	77	%	68	%	51	%	15	%
Same(-19 to +19 pts.)	Control	46	%	60	%	63	%	70	%	83	%
Same(-19 to +19 pts.)	Debt Consolidators	14	%	20	%	26	%	39	%	73	%
Worsened(-20 pts. or less)	Control	19	%	18	%	19	%	16	%	13	%
Worsened(-20 pts. or less)	Debt Consolidators	2	%	3	%	6	%	10	%	12	%

*VantageScore 3.0 risk ranges: Subprime= 300-600; Near Prime= 601-660; Prime= 661-720;Prime Plus= 721-780; Super Prime= 781-850

Strong performance following debt consolidation

These consumers’ higher credit scores may make them more attractive to lenders, which in turn leads to them receiving more offers for credit and ultimately to greater new credit originations. Not only were these borrowers more likely to obtain a new auto loan or credit card following consolidation, they also originated mortgages at a higher rate within the following 12 month period.

Despite a rise in overall indebtedness, consolidators performed significantly better than non-consolidators on all credit products in their wallet, even when controlling for credit risk score. In the year following consolidation, consolidators showed fewer past due accounts than non-consolidators, and in particular had a lower serious delinquency rate—defined as 90 or more days past due (“DPD”)—on credit card accounts. In addition, debt consolidation loans performed better than personal loans used for other purposes. In the prime risk tier, debt consolidation loans had a serious delinquency rate (defined as 60+DPD for this product) of 1.1% compared to 2.4% for loans used for other purposes.

“The question surrounding debt consolidation is whether these loans are enabling consumers to take on more debt than they can handle. While these consumers do end up taking on more debt initially, our research shows debt consolidation loans do have a positive impact on consumer performance. A personal loan used for debt consolidation tends to be a better performing loan overall. In short, debt consolidation loans generally appear to do what they’re designed to do, and that’s a benefit to consumers,” concluded Pagel.

For more information on TransUnion’s Debt Consolidation Study, please download the informational quick guide.

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