How debt consolidation affects your credit score

The positive and negative impacts of moving your debt around.

Updated

Knowing the impacts that debt consolidation can have on your credit is as important as the consolidation itself. Do it right and your scores can climb accordingly. Do it wrong and your efforts can backfire.

Scotiabank Value Visa Card

Scotiabank Value Visa Card

12.99 % APR

Purchase interest rate

Eligibility criteria, terms and conditions, fees and charges apply

Scotiabank Value Visa Card

Apply today and enjoy a 0.99% introductory interest rate on balance transfers for the first 6 months.

  • Purchase interest rate: 12.99%
  • Cash advance rate: 12.99%
  • Intro balance transfer rate: 0.99% for the first 6 months
  • Standard balance transfer rate: 12.99%
  • Annual fee: $29
  • Minimum income: $12,000
Go to site
Promoted

How can debt consolidation hurt my credit?

Creditors do a hard pull on your credit when you take out a new loan or credit card, which temporarily lowers your credit score. Getting a balance transfer credit card can cause your score to dip even more, as having a high balance on a single credit card could hurt your score. Your credit score isn’t entirely safe if you use a debt relief company either. Even if it successfully negotiates a lower balance and better rates, your creditor might report bad debt, which hurts your credit score.

How it can help my credit?

Using a debt consolidation loan might be a better choice for someone concerned about their credit score, especially if it helps you pay off your debt on time and quickly. That’s because on-time repayments are the most important factor in your credit rating, accounting for around 35% of the factors that contribute to your score.

No matter which method you choose, remember: Less debt means better credit. If debt consolidation can help you reduce your debt, it will ultimately help your credit score.

Pros & cons of debt consolidation

Pros

  • Simplifies your debts. When you consolidate your debts, you end up paying one payment to a single lender instead of multiple payments to different lenders. This is both simpler and less time consuming.
  • Potentially lowers your interest rate. Often, debt consolidation loans result in a lower interest rate than what you were previously paying. This means that more of your money can pay down debt instead of merely keeping up with interest.
  • Gets you debt free sooner. With a lower interest rate, you can pay off your debts faster and have more money to spend on the things that matter to you.

Cons

  • Another hit to your credit score. Applying for a debt consolidation loan requires a hard pull on your credit, which will temporarily drop your score.
  • May not lower your payments if you’re already paying low interest. Debt consolidation loans are useful for lowering and streamlining your repayments, but this won’t be very effective if you try to consolidate debts that are already low interest like student loans and government loans.
  • You could end up paying more. Some lenders offer loans for debt consolidation that don’t actually lower your interest rate or improve your repayment period. This is why it’s important not to act hastily when choosing the right lender for you. Take time to compare your options.

Tips for consolidating debt without hurting your credit

While everyone’s situation is different, there are a few ways to lesson the impact to your credit while consolidating debt:

  • Consolidate and pay off your revolving debt first. Revolving debts like credit cards tend to have a higher impact on your scores than installment debts. Prioritizing a zero balance on your revolving debts could reduce the impact on your credit.
  • Make more than the minimum payment. If your situation allows for it, pay more than the required minimum on your consolidated loans.
  • Make on-time payments. Showing creditors that you can make payments in a timely manner goes a long way toward keeping your scores intact.
  • Only apply for loans or credit cards that you know you’re qualified for. Doing this will help you avoid multiple hard credit pulls, which can negatively affect your credit.

Compare options for consolidating your debt

Compare loan options

Name Product Interest Rate Max. Loan Amount Loan Term Fees Min. Credit Score
Marble Fast-Track Loan
18.99% – 24.99%
$15,000
36-84 months
Legal and admin fees of $295 - $1,500 (based on size of loan)
300
Marble Financial offer credit builder loans in amounts from $2,500 to $15,000. Improve your financial health within 36 months. This loan is strictly for borrowers exiting a consumer proposal.
LoanConnect Personal Loan
4.6%-46.96%
$50,000
6-60 months
No application or origination fees
N/A
LoanConnect is an online broker that matches borrowers to lenders offering loans in amounts from $500 to $50,000. Get approved in as little as 60 seconds with any credit score.
Fairstone Debt Consolidation Loan
19.99% - 39.99%. Varies by loan type and province
$35,000
6 months - 10 years
None
560
Consolidate your debt up to $20,000 for an unsecured loan and $35,000 for a secured loan.
loading

Compare up to 4 providers

Compare balance transfer cards

Name Product Purchase Interest Rate Balance Transfer Rate Balance Transfer Fee Annual Fee Minimum Income Reward Description
BMO Preferred Rate Mastercard
12.99%
3.99% for the first 9 months (then 12.99%)
1%
$20
$15,000
Take advantage of an introductory balance transfer offer, annual fee waiver in the first year, and low purchase and cash advance interest rates.
Get a rate of 3.99% on balance transfers for 9 months with a 1% transfer fee. Plus, get the $20 annual fee waived in the first year.
BMO Rewards Mastercard
19.99%
1.99% for the first 9 months (then 22.99%)
1%
$0
$15,000
Get 1 BMO Reward point for every $1 spent on eligible purchases, and get 2 BMO Rewards points for every $1 spent at participating National Car Rental and Alamo Rent A Car locations.
Earn a bonus of up to 20,000 BMO Rewards points. Plus, get a rate of 1.99% on balance transfers for 9 months. A 1% fee applies to transferred balances.
BMO AIR MILES Mastercard
19.99%
1.99% for the first 9 months (then 22.99%)
1%
$0
$15,000
Get 2 AIR MILES for every $20 spent at eligible AIR MILES partners, and get 1 AIR MILE for every $20 spent elsewhere.
Earn 800 AIR MILES Bonus Miles. Plus, get a rate of 1.99% on balance transfers for 9 months. A 1% fee applies to transferred balances.
BMO CashBack Mastercard
19.99%
1.99% for the first 9 months (then 22.99%)
1%
$0
$15,000
Earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases.
Get up to 5% cash back on all eligible purchases in the first three months of card membership (up to a maximum spend of $2,000, and earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases thereafter). Plus, get a rate of 1.99% on balance transfers with a 1% balance transfer fee for nine months.
BMO AIR MILES Mastercard For Students
19.99%
1.99% for the first 9 months (then 22.99%)
1%
$0
$15,000
Earn 2 AIR MILES for every $20 spent at eligible AIR MILES partners, and earn 1 AIR MILE for every $20 spent elsewhere.
Earn 800 AIR MILES Bonus Miles. Plus, get a 1.99% introductory interest rate on balance transfers for 9 months. A 1% fee applies to balance amounts transferred.
BMO CashBack Mastercard For Students
19.99%
1.99% for the first 9 months (then 22.99%)
1%
$0
$15,000
Earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases.
Get up to 5% cash back in the first three months (up to a maximum spend of $2,000, and earn 3% cash back on groceries, 1% on recurring bill payments and 0.5% on all other eligible purchases thereafter). Plus, get a rate of 1.99% on balance transfers for 9 months, with a 1% fee for every transferred balance.
No-Fee Scotiabank Value Visa Card
16.99%
3.99% for the first 6 months (then 16.99%)
N/A
$0
$12,000
Save with a low interest rate, no annual fee and a balance transfer offer.
Get a 3.99% introductory interest rate on balance transfers with a 0% balance transfer fee for the first 6 months. Apply by October 31, 2020.
Scotiabank Value Visa Card
12.99%
0.99% for the first 6 months (then 12.99%)
N/A
$29
$12,000
Save on interest for 6 months by consolidating your higher-rate balances with the balance transfer offer, and get an on-going 12.99% interest rate on purchases, cash advances and balance transfers.
Get a 0.99% introductory interest rate on balance transfers with a 0% transfer fee for the first 6 months. Apply by October 31, 2020.
Scotia Momentum Visa Card
19.99%
2.99% for the first 6 months (then 22.99%)
N/A
$39
$12,000
Earn 2% cash back on all eligible gas station, grocery store and drug store purchases and on recurring bill payments (up to a $25,000 annual spend), and earn 1% cash back on all other eligible purchases (and on all eligible purchases once the $25,000 annual spend is reached).
Get a 2.99% introductory rate on balance transfers and a 0% balance transfer fee for the first 6 months. Apply by October 31, 2020.
Tangerine Money-Back Credit Card
19.95%
1.95% for the first 6 months (then 19.95%)
3%
$0
$12,000
Earn 2% cash back in two categories of your choice (or three categories if you open a Tangerine Savings Account and directly deposit your cash back into the account), and 0.5% cash back on everything else.
Get a 1.95% interest rate on balance transfers for the first six months (valid within the first 30 days of account opening).
loading

Compare up to 4 providers

Consolidating debt with good credit

Having a solid credit score can open the doors to more favorable rates and terms when you’re comparing consolidation options. If your goal is to have one monthly payment, shop around for a balance transfer credit card with a low introductory rate or a low-interest debt consolidation loan.

Another option is to take out a home equity line of credit, though you should consider the risks and weigh all options before tapping into your home’s equity.

Consolidating debt with bad credit

Debt consolidation with bad credit is tricky — but not impossible. You might have to go off the beaten path to find an option that helps more than it hurts.

Getting a debt consolidation loan with bad credit

A few of your options are:

  • Peer-to-peer lenders. True, these lending services do have credit score cutoffs, but they tend to be lower than what you’ll find at a bank.
  • Credit unions. As nonprofit financial institutions, credit unions also have lower credit requirements than for-profit lenders.
  • Secured loans. Get more favorable terms on your debt consolidation loan by putting up collateral.
  • Applying with a cosigner. Having a friend or relative with good credit back your loan makes you less of a risk to lenders and could get you a better deal. Learn about which lenders accept cosigners on personal loans by reading our guide.
  • Credit counseling. Some nonprofits designed to help people get out of debt offer counseling. They can even negotiate with lenders — though you might have to pay them a fee.

I’ve paid off my debts. When will my credit score update?

Once you’ve paid off your debts, it can take anywhere from one to two months for the credit bureaus to update your scores. Though paying off debt will likely result in a score improvement, keep in mind that your credit history and past debts will not be erased and may still show up on your report for up to seven years.

Bottom line

Consolidating your debts into 1 monthly payment can be an attractive option, but it’s important to understand the resulting positive and negative impacts to your credit score.

Before making any moves, compare your debt consolidation options. And if your debt gets too much to handle, you can always look into a debt relief company.

Ask an Expert

You must be logged in to post a comment.

Go to site