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College Student Spending Habits for 2021

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

College students face a crucial point in their financial lives—it’s the time where most take out student loans and apply for their first credit cards. Very often, they graduate with the burden of debt.

The cost of college has increased 135 percent in the past 10 years for public four-year universities according to the College Board. On top of that, college students face a diverse set of personal obstacles that affect their finances since they vary greatly in age and life experience. While some students are fresh out of high school, others are returning to school after having a child or serving in the military.

The average student spends a lot of money trying to get their degree. Our guide is refreshed for 2021 to reflect the ways things like spending habits and spending power fluctuate over the years. Before diving into college student spending habits, we’ll first take a look at this group’s overall spending power.

College Student Spending Power 

College students had $376 billion in spending power in 2019. The 21.4 million college students in the country earn money in a variety of ways. Most college students make some sort of financial contribution to their education and many pick up jobs to cover these costs. Take a look at the stats below to see how college students earn their money. 

  • College students had $376 billion in spending power in 2019. [Source: Refuel Agency]
  • 67 percent of millennial college students received $2,000 or less from their parents each year in 2020. [Source: OppLoans]
  • 44 percent of millennial college students worked every year they were in school in 2020. [Source: OppLoans]
  • 86 percent of millennial college students worked summer jobs in 2020. [Source: OppLoans]
  • 65 percent of millennial college students had to take out student loans to pay for their degree in 2020. [Source: OppLoans]
  • 74 percent of millennial college students contributed to funding their education in 2020. [Source: OppLoans]
  • U.S. households planned to spend around $1,059.20 on back-to-school shopping for college students in 2020. [Source: NRF]

How Much Do College Students Spend on Food?

College students spent a total of $39.6 billion on food alone in 2020. Food costs range from groceries and coffee to eating out. There are several reasons why college students spend so much on food. 

The rise of social media and the need to purchase things for status are a couple factors that encourage students to splurge on Instagram-worthy food when they really shouldn’t. Other reasons include using food as an excuse to socialize or to take breaks from studying. Read on to see how college students spend on food.

  • College students spent $39.6 billion on food alone in 2020. [Source: Refuel Agency]
  • For back-to-school shopping among college students, individual students expected to spend $111.32 on food items in 2020. [Source: Statista]

  • For millennial college students receiving spending money from their parents, 76 percent said they mainly spent it on eating out in 2020. [Source: OppLoans]
  • 53 percent of millennial college students who received spending money from their parents in 2020 said they spent it on drinks and snacks. [Source: OppLoans]

How Much Do College Students Spend On Books and Supplies?

While the amount of course materials students are purchasing hasn’t changed, the cost of them is on the downward trend thanks to more affordable options like renting and digital copies. Read on to see different highlights of college student spending on course materials.

Course Material and Supply Costs

College textbooks vary in price, but can cost a small fortune depending on the degree. Some students go to extreme lengths to afford their textbooks including skipping meals and skipping trips home. Below are the different costs college students face when purchasing course materials and other supplies.

  • For the 2019-2020 academic school year, college students spent $413 on average on required course materials and supplies. [Source: On Campus Research]
  • The $413 average spent on course materials for the 2019-2020 school year indicates a 41 percent decrease since 2007, when the average was $701. [Source: On Campus Research]
  • For the 2019-2020 academic school year, college students spent around $47 per class on required course materials. [Source: On Campus Public Research]
  • The amount college students spent on required course materials for the 2019-2020 academic school year decreased by 6 percent since the 2018-2019 school year. [Source: On Campus Public Research]
  • Of all the different categories of spend that college students planned to budget for in 2020, 89 percent reported school supplies as the top category. [Source: National Retail Federation]
  • Students acquired an average of 7.7 required materials for the 2019-2020 academic school year. [Source: On Campus Research]
  • 30 percent of students said they spent more money on textbooks in 2019 as compared to what they spent in 2018, while 28 percent said they spent about the same. [Source: FlatWorld Knowledge]
  • 40 percent of students chose not to purchase at least one of their assigned textbooks due to its high cost. [Source: FlatWorld Knowledge]

Types of Materials and Where They’re Buying

College students are frugal when considering where they’ll buy course materials and what types of course materials they purchase. Some options, like renting or buying digital books, save a lot but come with their own drawbacks. Read on to see how college students differ when deciding what materials to get and where to buy them.

  • 26 percent of college students used free methods to obtain course materials in 2020. [Source: On Campus Research]
  • Of all course materials college students purchased in 2020, 54 percent were bought from a campus store. [Source: On Campus Research]
  • 49 percent of students opted to purchase used textbooks instead of buying them new in 2019. [Source: FlatWorld Knowledge]
  • 31 percent of students purchased a combination of used and new textbooks in 2019.  [Source: FlatWorld Knowledge]
  • 47 percent of students who purchased at least one used textbook in 2019 said they chose an older version of it for the sake of affordability. [Source: FlatWorld Knowledge]
  • 29 percent of students said they only bought one digital version of an assigned textbook in 2019. [Source: FlatWorld Knowledge]
  • 30 percent of students said they didn’t buy any digital versions of their assigned textbooks in 2019. [Source: FlatWorld Knowledge]
  • 65 percent of students who opted for digital textbooks purchased them individually, while 29 percent reported purchasing them through a subscription in 2019. [Source: FlatWorld Knowledge]
  • 58 percent of students bought at least one assigned textbook on Amazon in 2019. [Source: FlatWorld Knowledge]
  • 51 percent of students said they bought at least one of their assigned textbooks at their campus bookstore in 2019. [Source: FlatWorld Knowledge]
  • Only 17 percent of students made online textbook purchases directly from the publisher in 2019. [Source: FlatWorld Knowledge]
  • 30 percent of students said at least one of the textbooks they purchased online was not from Amazon in 2019. [Source: FlatWorld Knowledge]

How Much Do College Students Spend on Clothing and Personal Care?

College students spent a combined $9.5 billion on clothing and accessories in 2019. The rising trend of natural, eco-friendly products is one factor that is possibly driving purchases up in this sector. Take a look at the stats below to learn how much money college students sacrifice for clothing and personal care.

  • College students anticipated spending a combined $67.7 billion for the 2020 school year on clothing and accessories, food, electronics, personal care items, and furniture. [Source: Statista]
  • Individual college students anticipated spending around $148.37 on clothing and accessories for the 2020 school year. [Source: Statista]
  • Individual college students anticipated spending around $64.91 on collegiate branded clothing and accessories for the 2020 school year. [Source: Statista]
  • 59 percent of millennial college students who received spending money from their parents said they would primarily spend it on clothes in 2019. [Source: OppLoans]
college students planned to spend $235 on electronics, $148 on clothes and accessories, $120 on furniture and $65 on collegiate branded gear for the 2019–2020 back-to-school season.

Take a look at what individual college students planned to spend during the 2019-2020 back-to-school shopping season:

  • Electronics: $234.69
  • Clothes and Accessories: $148.37
  • Furniture: $120.19
  • Collegiate Branded Gear: $64.91

How Much Do College Students Spend on Rent and Transportation?

College students spend an average of $11,140 on living accommodations and $2,800 on transportation over the course of their time in school. The cost of rent, room and board, and transportation for college students depends greatly on where they attend. Costs can greatly differ between in-state and out-of-state colleges and between private and public colleges. Learn more about how these costs differ and how much students pay for rent and transportation alone.

  • Students pay an average of $11,140 for room and board at a public four-year university. [Source: Credible]
  • Students pay an average of $12,680 for room and board at a private four-year university.[Source: Credible]
  • College students spend an average of $2,800 on transportation during their time in school. 
  • Around seven to 12 percent of the total U.S. rental housing market is taken up by student housing rentals. [Source: NHMC Research Foundation]
  • The average cost of rent for student housing is $637 per month. [Source: NHMC Research Foundation]
  • Students will spend an average of $1,050 to $1,800 on transportation costs alone annually. [Source: College Board via Edmit]
  • College students planned to spend an average of $129.76 on dorm or apartment furnishings in 2020. [Source: National Retail Federation]

  • More than 70 percent of college students say the high cost of living is their main concern at school. [Source: Chegg]
  • The cost of living for college students varies greatly based on location: New York University’s room and board costs for 2020 are around $19,244 per year, compared to $10,196 per year at University of Nebraska Omaha. [Source: Credible]

Typical College Student Budget

While the exact details of every college student’s budget are different based on where they attend school and the costs of living associated with different locations, there are some trends in the main categories of spend. The main cost difference is found in tuition, which is more than double for out-of-state students compared to in-state students. Learn more about the different budget trends for students attending college in-state and those attending out-of-state for the 2020-2021 academic school year. [Source: Statista]

Yearly Budget for College Students: In-State

  • Tuition and fees: $10,560
  • Room and board: $11,620
  • Books and supplies: $1,240
  • Transportation: $1,230
  • Other expenses: $2,170

Yearly Budget for College Students: Out-of-State

  • Tuition and fees: $27,020
  • Room and board: $11,620
  • Books and supplies: $1,240
  • Transportation: $1,230
  • Other expenses: $2,170

College Student Debt

Student loan debt is at the forefront of the news and many outlets are reporting on the struggles millennials, baby boomers and everyone in between face. Other everyday costs like food and housing also contribute to the list of expenses college students need to cover while taking classes.

We found that most Americans would rather attend an affordable college than a highly ranked school. This shows that college students are highly aware of the costs of attending college and the financial sacrifices they may need to make. Read on to learn about the impact of college student debt.

Student Stress and Debt

Students feel a lot of stress from their finances. Many students feel the pressure of piling debt and many cite financial stress as even more impactful than stress felt from academics. To get a better idea of these stressors, take a look at the stats below.

  • Student loan debt has reached over $1.67 trillion as of August 2020. [Source: Bankrate]
  • The total student loan debt is higher in 2020 than it was in 2019, when it averaged $1.598 trillion. [Source: Credible]
  • College students carried an average student loan debt of $33,654 individually in 2019. [Source: Credible]
  • College students paid an average of $393 per month towards student loans in 2019. [Source: Credible]
  • There were 43 million student loan borrowers in 2019. [Source: Credible]
  • 2.8 million students who borrowed loans in 2019 owe $100,000 or more. [Source: Credible]
  • 67 percent of students said that finding a job that provided them with financial security was a primary concern in 2019. [Source: Chegg]
  • For every five students, four report the high cost of education as the primary issue impacting them in 2019. [Source: Chegg]
  • Over 50 percent of students said mental health was a primary concern throughout school in 2019 due to financial strain and academic pressure. [Source: Chegg]
  • Women hold nearly two-thirds of student debt in the country, totalling nearly $929 billion in 2020. [Source: AAUW]
  • First-generation college students are burdened with more debt when they graduate in 2020.  [Source: AAUW]
  • The cost of a college education has increased by 103 percent since 1987.  [Source: AAUW]

Family Sacrifices

College debt often causes stress not just for students, but for their families as well. Many parents choose to sacrifice things like recreation and retirement to financially support their children. Take a look below at all of the ways debt also impacts families.

  • 91 percent of millennial college students said they spent money responsibly in 2019, but 29 percent of their parents disagreed. [Source: OppLoans]
  • For millennial college students who received spending money from their parents in 2019, 45 percent report spending it “very responsibly,” but just 18 percent believed their parents would agree. [Source: OppLoans]
  • 51 percent of students’ parents anticipated increasing the amount they spent on virtual learning tools for their kids in 2020. [Source: PR Newswire via Deloitte]
  • 50 percent of low income families are worried about their ability to afford upcoming tuition payments in 2020, compared to 30 percent of families overall. [Source: PR Newswire via Deloitte]

  • 52 percent of families had a plan for how they’d pay for their kids’ college tuition for the 2019-2020 academic school year. [Source: Sallie Mae]
  • Around $30,017 was spent by families on college for the 2019-2020 academic school year. [Source: Sallie Mae]
  • 44 percent of college costs were paid from parents’ income and savings in 2020. [Source: Sallie Mae]
  • 8 percent of college costs were paid with borrowed money by parents in 2020. [Source: Sallie Mae]
  • 20 percent of parents borrowed money to cover their kids’ tuition in 2020. [Source: Sallie Mae]

The financial choices college students make can follow them for years after graduation. We’re all aware of the student loan crisis, but other financial decisions like late payments and maxed out cards can also take a significant toll if not immediately addressed. It can get particularly overwhelming if you haven’t checked your credit report in a while and feel unsure about what’s on it.

You should regularly check your credit report to ensure all of your information is accurate and fairly reported. If you need help tackling negative items you find on your credit report, you can get in touch with the team at Lexington Law to learn about how credit repair might be able to help clean up your credit report.

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Credit Cards

What is purchase APR for credit cards?

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Woman sitting by the sofa shopping online on laptop with bank card in hand.

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A purchase annual percentage rate (APR) determines the amount of interest that is added to an outstanding credit card balance each month. While the rate is calculated by the year, the interest charge is added monthly to the unpaid balance.

Most credit cards include a purchase APR—annual percentage rate—that is used to calculate the interest on an unpaid credit card balance. 

While APR is an annual percentage rate, credit card interest is actually applied monthly by calculating one-twelfth of the APR. For example, a credit card with an APR of 24 percent would have a 2 percent interest charge added monthly to any outstanding balance. 

Since APR is only applied to outstanding balances, interest charges can be avoided entirely by paying off the full balance of a credit card by the due date each month. 

Read on to learn more about different aspects of APR as well as real-world examples of how APR works. 

Important aspects of credit card APR

Although APR is a straightforward calculation, there are a few important details to consider when looking at a credit card’s APR. Keep in mind that credit cards often have multiple APRs and that APR can change over time. 

Credit cards often have multiple APRs

When discussing APR, most people refer to a credit card’s “purchase APR,” also referred to as “standard purchase APR.” This is the rate that’s applied to regular purchases, including goods and services. 

Different types of APR. Purchase APR, cash advance APR, penalty APR and balance transfer APR.

However, credit cards can do more than just make purchases, so there are several other APRs depending on the activity:

  • Cash advance APR: If you use a credit card to receive a cash advance, you’ll pay interest according to the cash advance APR. Often, the rate for cash advances is higher than normal purchases. Also, interest typically begins to accrue immediately rather than after the due date for the monthly bill. 
  • Balance transfer APR: After you transfer a balance from any line of credit to a credit card, interest will begin to accrue at the rate set by the balance transfer APR. Some credit cards offer a promotional period where transferred balances accrue no interest. 
  • Penalty APR: When your credit card payments are late—typically by more than 60 days—many credit card companies will institute a higher penalty APR, which can affect both the outstanding balance as well as future purchases on the credit card. Penalty APRs can also be activated for other reasons outlined in a cardholder agreement. 

Understanding all of these different kinds of APR makes it easier for you to use credit cards to their fullest while avoiding costly interest payments. 

That said, it’s also important to note that APR is not a permanent number, and it can change over time for a variety of reasons.

APR can change over time

The initial APR for purchases and other activities will be laid out in the cardholder agreement you sign when the card is issued. Typical APR ranges from 15 percent to 22 percent, but cards can have higher or lower APR for a variety of reasons. In any case, the initial APR for your credit card may change over time.

Reasons APR may change over time.

Here’s what you need to know about how and why APR changes over time.

  • Introductory APR: Some credit cards include a lower introductory or promotional APR for a set period of time, usually between three and 24 months after the credit account is opened. After the introductory period ends, a higher APR takes effect. 
  • Variable APR: Some credit cards have a variable APR that is tied to economic factors, like the “prime rate,” which is published by the U.S. Federal Reserve. As this number changes, the APR on your credit card will change as well. 
  • Penalty APR: As noted above, certain actions—like late payments—can lead to a penalty APR that is often significantly higher than the standard APR. The APR often decreases again after six months or more of on-time payments. 
  • Credit score change: If you have a significant change in your credit score, the credit card company may raise or lower your purchase APR accordingly. 

Although APR can change, credit card companies are generally not allowed to change your APR in the first year of your account’s existence. Credit card issuers typically provide notice at least 45 days before increasing a card’s APR. There are a few exceptions to this rule, however, like if your promotional period ends within the first 12 months of your account being opened. 

Let’s take a look at some examples of how purchase APR works. 

Examples of purchase APR

Looking more closely at different purchase APRs makes it clear that interest rates make a big difference when you carry a balance on your credit card.

Example of how purchase APR works.

Let’s imagine that you purchase a $2,500 exercise bike with your credit card and plan to pay off the balance over the next 21 months. 

With a credit card that has a 25 percent APR, you’ll spend $148 each month to pay off the balance for that purchase, and you’ll have paid for more than $600 of interest along the way. 

With a credit card that has a 15 percent APR, your monthly payment will be $136 until the balance is paid off, and you’ll accrue $358 of interest as you make payments.

With a credit card that has a promotional 0 percent APR for 12 months (then a 15 percent APR), your monthly payment will be $122, and you’ll only accrue $66 of interest over the course of the 21 months.

Clearly, different purchase APR can make a big difference when it comes to paying off credit card debt. 

Getting a card with a low APR may depend on a person’s credit history, if you need help managing your credit profile, Lexington Law Firm provides qualified credit repair services. 


Reviewed by Horacio Celaya, Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Horacio Celaya was born in Tucson, Arizona but eventually moved with his family to Mexicali, Baja California, Mexico. Mr. Celaya went on to graduate with Honors from the Autonomous University of Baja California Law School. Mr. Celaya is a graduate of the University of Arizona where he graduated from James E. Rogers College of Law. During law school, Mr. Celaya received his certificate in International Trade Law, completing his thesis on United States foreign direct investment in Latin America. Since graduating from law school, Mr. Celaya has worked in an immigration firm where he helped foreign investors organize their assets in order to apply for investment-based visas. He also has extensive experience in debt settlement negotiations on behalf of clients looking to achieve debt relief. Mr. Celaya is licensed to practice law in New Mexico. He is located in the Phoenix office. 

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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3 ways to remove a closed account from your credit report

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

You can remove closed accounts from your credit report in three main ways: dispute any inaccuracies, write a formal “goodwill letter” requesting removal or simply wait for the closed accounts to be removed over time. That said, removing closed accounts can affect your credit score, so make sure you consider your situation first.

While it’s not always possible to remove a closed account from your credit report, it is straightforward to attempt to do so. However, it’s not always beneficial to remove closed accounts, and in some cases, it could even lower your credit score.

In general, you should try to remove a closed account with inaccurate negative information, but you should probably leave any accounts that are yours that are having a positive effect on your credit history.

Below, we’ll talk about whether you should try to remove closed accounts from your credit report, how closed accounts may affect your credit score and how to remove closed accounts. 

Should you remove closed accounts from your credit report?

You should attempt to remove closed accounts that contain inaccurate information or negative items that are eligible for removal. Otherwise, there is generally no need to remove closed accounts from your credit report. Inaccurate information could be pulling down your credit score and should be addressed, but older accounts with a good history may be helping your score. 

Even after closing an account—like a personal loan or credit card—the information related to your balances and payment history stays on your credit report for many years. In fact, both accounts closed in good standing and negative items or collection accounts may remain on your credit report for seven to 10 years. 

Deciding whether to try to remove a closed account ultimately comes down to understanding the factors that affect your credit score.

Deciding whether to remove closed accounts. Try to remove close accounts if they are: inaccurate, negative, fraudulent. You can leave closed accounts if they are: in good standing, helpful for credit utilization, beneficial for credit history.

Your credit score is calculated based on five main factors: payment history (35 percent), credit utilization (30 percent), length of credit history (15 percent), different types of credit (10 percent) and new credit (10 percent). 

Because a credit report includes both open and closed accounts, some of these credit factors can be affected by a closed account being removed from your report. For example, if you made payments on a personal loan for a number of years and that account is removed from your report, your length of credit history could decrease.

Having a closed account removed from your report may not affect your score, but in many cases, it is wise to leave accounts in good standing on your report, as they could have a positive impact overall. 

However, closed accounts with negative items eligible for removal and inaccurate information can lead to a lower score, so working to get those accounts removed is part of a sound credit repair strategy. 

Read on to learn how to get rid of closed accounts from your credit report.

How to remove closed accounts from your credit report

If you need to attempt to remove a closed account from your credit report—especially one that includes inaccurate information or negative items—there are three ways to do so. You can either dispute inaccurate information with the credit bureaus, write a formal “goodwill letter” to request removal or simply wait until the account is removed after a period of time. Each of these approaches can be useful depending on your particular situation.

Three ways to remove a closed account from your credit report: dispute inaccurate information, wait for the account to drop off your report, write a "goodwill letter."

Read on to learn more about when to try each of these different methods for getting a closed account off your credit report.

1. Dispute inaccurate information

If a closed account on your credit report includes inaccurate information, you can dispute the information and potentially get the item removed from your report. 

You can dispute the information using the following process:

  1. Send a letter to the three major credit bureaus—TransUnion®, Experian® and Equifax®—that explains what information you are challenging, why you believe it is inaccurate and that you would like it removed.
  2. Similarly, send a letter to the financial institution that provided the information to the bureaus.
  3. Wait for responses, then look at your updated report and score.

We have a guide that details the dispute process to help you along the way. 

2. Write a “goodwill” letter

A goodwill letter is a formal request to a creditor asking for a negative item to be removed. 

Although creditors are not required to remove negative items upon request, they may be willing to do so if you have a long history with them or if there were special hardships that led to the negative item. 

However, goodwill letters are generally useful only for late or missed payments rather than collections, repossessions or other more significant negative items.

In addition to goodwill letters, you can also request that an account is removed using a “pay for delete” letter. These letters can lead to an agreement with a collection agency to remove an account in exchange for a set payment. That said, the collection agency may decide not to remove the account, and the original account that went to collections may remain on your report. 

3. Wait for the closed account to be removed over time

Closed accounts do not stay on your report forever, so it’s possible to simply wait it out until a closed account is removed.

Accounts that were closed can remain on a credit report for around seven to 10 years. 

When an older closed account with negative information is potentially lowering your score, eventually it will drop off your report. Additionally, positive information about closed accounts also leaves your report over time, so it’s important to continue to practice good credit habits with a variety of account types.

If your credit report contains closed accounts with negative items or inaccurate information, the team at Lexington Law Firm can assist you with credit repair. By analyzing your credit report and assisting with disputes, our team can help you make strides in improving your credit score.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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Do debt consolidation loans hurt your credit?

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

When done correctly, debt consolidation loans usually do not hurt your credit long-term. In fact, there’s a good chance that they will ultimately improve your credit. However, debt consolidation can initially knock your score down a bit, which is why it’s important to do your due diligence before pursuing this strategy.

Debt consolidation is a way to combine multiple debts into a single loan. This not only reduces the interest you owe, but it also helps you organize your debt, making payments more manageable.

Debt consolidation can have positive and negative effects on your credit score. Here are a few areas it may negatively impact:

  • Credit applications: Applying for a personal loan or a balance transfer card requires that a hard inquiry be performed on your credit. This will likely lower your score a bit initially as you get the consolidation process started.
  • Average age of credit: The ages of your credit accounts matter, with older accounts garnering better credit scores. When you open a new account, it lowers your average credit age, which may initially negatively impact your score.

On the other hand, the following categories tend to be positively impacted by debt consolidation:

  • Credit utilization: A new debt consolidation account will usually increase the amount of available credit you have. As long as you don’t begin spending significantly more after opening the new account, you’ll be using less of your available credit, which will benefit your score.
  • Payment history: If you consistently pay off your new loan on time, your credit will likely be positively impacted.

Effects on credit score depend on the debt consolidation method

Each debt consolidation method comes with its own benefits and drawbacks. It’s important to acquaint yourself with the potential impacts of each method to make sure that consolidating debt results in a net gain for your credit health.

Balance transfer

A balance transfer is the process of transferring debt to a single credit card with a lower interest rate, allowing you to pay off your debts for less. Many balance transfer cards offer zero-percent APR during an introductory period, providing a window to pay off debt interest-free.

Despite the benefits offered, a balance transfer card could damage your credit score. First, applying for a new credit card may warrant a hard inquiry, which can bump your score down a bit. Second, your credit score is partially determined by credit utilization, and transferring significant amounts of money to a card and then paying it off involves high credit utilization on that card. This will likely harm your score.

If you decide to pursue a balance transfer card to pay off debt, be sure to investigate the card’s APR following the introductory period. Your interest rate may take you by surprise and skyrocket if you don’t do your due diligence.

The average length of a 0% APR introductory period is around 12 months for balance transfers. Source: WalletHub

Personal loan

Another popular debt consolidation method is taking out a personal line of credit. These loans are available at any time and can be used to quickly pay off debt.

If used correctly, personal loans can improve your credit score by diversifying your credit mix, especially if you’ve only had credit cards up until this point. Paying off debt with a loan rather than with credit can also reduce your credit utilization, which may boost your score.

That said, it’s important to remember that this process involves taking out a loan that must be paid back on time. You may also want to reconsider this option if your present score doesn’t allow you to take out a personal loan without being charged a high interest rate.

Borrowing from a 401(k)

If you have a 401(k) retirement account, you can borrow up to half of this balance to pay off debt. While it must be paid back within five years to avoid penalties, borrowing from a 401(k) does not have any adverse effects on your credit score. Moreover, the money you borrow doesn’t accumulate interest since 401(k) funds aren’t borrowed from a lender.

However, it’s important to remember what a 401(k) is meant for—retirement. Taking out funds for short-term debt payments can significantly detract from your retirement savings. You may also have to deal with tax repercussions when taking this course of action.

Nearly one-third of Americans with retirement accounts have borrowed from those accounts in the form of a loan. Source: SHRM

Home equity loan or line of credit

Home equity loans or lines of credit are perhaps the riskiest forms of debt consolidation, but they also offer some significant benefits. Essentially, lenders will offer you a loan and use your home as collateral. This means that if you fail to pay off the loan within the amount of time agreed upon, you could lose your home.

You must have excellent credit to take out a home equity loan or line of credit. When you apply, you will be hit with a credit check, which could initially lower your score a bit. While the impact on your score will likely be relatively insignificant, these loans can also accumulate very high interest, so it’s important to use discretion before taking one out to pay off debt.

Other options to consider

If debt consolidation doesn’t feel right for you, that’s okay. There are other debt relief options that could help restore your peace of mind regarding your financial situation.

Debt management program

Debt management services can help by counseling you regarding your options when you’re struggling with debt. A debt management program will likely involve a counselor negotiating lower interest with creditors and potentially closing credit cards.

While visiting a counselor at a debt management agency doesn’t harm your credit score at all, entering into a debt management program that reduces how much you have to pay does usually negatively impact your score. Your credit report will likely reflect the debt management program in effect until you are no longer using it.

Debt settlement or bankruptcy

Debt settlement is the process of negotiating with creditors to pay significantly less money than you owe to have your debt forgiven. Bankruptcy is a legal process that helps people organize and sometimes eliminate their debt. Bankruptcy, however, is a more long-term option than the other ones we’ve mentioned.

These two options should be a last resort when struggling to pay off debt, as they can have a significantly adverse effect on your credit score. Both debt settlement and bankruptcy will remain on your credit report for upwards of seven years, and sometimes up to ten years, negatively impacting your ability to open new accounts or apply for a loan. However, if you need to take care of massive debt now and you take wise financial steps in the future, these processes could end up ultimately being the right solution for you.

Should I consolidate my debt?

Before pursuing debt consolidation, it’s important to take a comprehensive look at the reasons you’re interested in consolidating debt and your plans for the foreseeable future.

Do you have a high interest rate?

If the interest on the debt you owe is 20 percent or more, you’ll likely save money by consolidating debt. However, certain balance transfer options charge fees that may counteract the benefits of debt consolidation. Do your research ahead of time to figure out which option saves you more money.

Are you missing payments?

Keeping track of all of your accounts can be stressful. If remembering to pay your bills has been a struggle and you’ve found yourself repeatedly missing payments, debt consolidation may help. Consolidating your debt could simplify your financial life by allowing you to take care of all payments at once. This will also benefit your credit in the long run, since missed and late payments can be detrimental to your score.

Do you need excellent credit in the short term?

If you’re planning to take out a loan or a mortgage anytime soon, you may feel the need to safeguard your credit score at all costs. Since many debt consolidation methods will put a temporary dent in your score, it may be wise to hold off until after you’ve been approved by a lender.

Ultimately, whether you decide to pursue debt consolidation and which method you choose depends on the weight of your debts and what would benefit your credit most. If you’re still on the fence, it’s a good idea to consult a financial advisor before making any decisions that could have long-lasting consequences.

Whichever decision you make, remember to keep your credit health at the forefront of your mind, and to take the steps where needed to repair your credit to expand your financial opportunities.


Reviewed by Cynthia Thaxton, Chief Compliance Officer. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah, North Carolina and Virginia.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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