What impact does consolidating debts typically have on credit scores?

Consolidating debts can temporarily lower a credit score due to several factors related to how credit scores are calculated. When a consumer consolidates debt, often through taking out a new loan to pay off existing debts, this action results in a hard inquiry on their credit report. Hard inquiries can temporarily decrease credit scores since they indicate that the borrower is seeking new credit.

Additionally, when debts are consolidated, the credit utilization ratio may initially change. If the new loan increases overall debt without immediately improving payment history or reducing balances across credit accounts, it might give the impression of higher risk, which can negatively affect the score in the short term.

However, over time, if the debt consolidation leads to improved management of payments and a decrease in overall debt levels, the score can eventually improve. This nuanced relationship helps to understand why the consolidation of debt might lower credit scores initially, making "it can lower the score temporarily" a true statement regarding its immediate impact on credit ratings.