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How debt consolidation affects your credit score

Debt consolidation can positively or negatively impact your credit score depending on which action you take.

Consolidating your debt can be a really good way to increase your credit score in many situations. You can consolidate your debt with either a debt consolidation loan or a credit card balance transfer (or you can consult a debt relief company to lower the amount you owe). Find out more about how each option may affect your credit score.

3 types of debt consolidation

There are three main types of debt consolidation you can take advantage of. These include loans, credit card balance transfers and debt relief.

  • Debt consolidation loans. These loans help you to pay off all of the debts that you owe at one time, so you’re left with just a single loan and one easy payment. This makes your debt load easier to manage and can save you money on interest and late payment fees. You can also use a loan to pay off your credit cards if you want to diversify your debt portfolio to improve your overall credit score.
  • Credit card balance transfer. If you only have credit card debt, you can consolidate by transferring all of your outstanding credit card balances to a low-interest card. This can save you a significant amount of money on interest and combine all of your debts into one easy payment. Just make sure you understand how aggregate and single-card credit utilization rates can affect your score if you go this route.
  • Working with a debt relief company. Working with a debt relief company can help you reduce the total amount of money you owe. This is a good solution if you simply can’t afford to consolidate your loans as they stand. Just be aware that this option can significantly reduce your credit score for a long time and should be avoided wherever possible.

      Compare debt relief companies

      1 - 1 of 1
      Name Product Costs Requirements
      Debt.ca
      Varies (depends on the company you're connected with)
      At least $10,000 in unsecured debt, a hardship that is preventing you from paying your creditors
      A nationwide service that can help you find a solution to reduce your debt payments by up to 50%. Request a free consultation with a trained debt relief specialist.
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      Will debt consolidation affect your credit?

      Depending on which type of debt consolidation you choose, consolidating the money you owe can affect your credit score in these two ways:

      1. Your credit score can go down. Your credit score can go down when you initially sign up for debt consolidation. This is a common outcome when a creditor does a hard pull on your credit or you take on new or “immature” debts. Once you start making payments on a consistent basis, you should see your score start to climb.
      2. Your credit score can go up. Your credit score will typically start to go up after a few months or years of making on-time and consistent payments. Just be aware that you’ll lose any progress you make on your credit score if you fall behind on your repayments.

      How debt consolidation loans affect your credit score

      Debt consolidation loans will affect your credit score differently depending on how you use them. For example, if you’re using them to help pay off credit card debt then they can increase your credit score right away by diversifying your debt. You can also use them to help lower your aggregate or single-card credit utilization, which could also bring your score up.

      If you’re using them to pay off other loans, they could have a negative impact on your score in the beginning. This is because you’ll have to submit to a hard credit pull and take on more immature debt when you take out a debt consolidation loan. That said, your credit score should go up once you make several on-time payments.

      How balance transfer credit cards affect your credit score

      The way balance transfer credit cards affect your credit score depends on how many credit cards you have and how much you owe. Transferring your outstanding balance to a single low-interest credit card requires you to open a new card.

      This can lead to a hard pull on your credit and also adds immature debt to your portfolio, which will lower your overall score. Opening a new card also involves some complicated math using aggregate and single-card credit utilization rates (outlined below) that can either raise or lower your score.

      How credit utilization rates affect your credit score

      1. Decreasing aggregate utilization rates can increase credit score

      Adding more credit cards to your portfolio means you have a higher balance spread across several credit cards. When you add a card, it increases your overall credit limit and lowers your aggregate credit utilization. Lowering the percentage for your aggregate credit utilization can bring your credit score up.

      Example of how aggregate credit utilization works

      For example, let’s say you have 3 cards that each have a $5,000 credit limit. This adds up to an overall credit limit of $15,000. If you owe $10,000 across all of your credit cards, your aggregate credit utilization will be around 67% ($10,000 owing/$15,000 overall limit = 0.67).

      When you add in a fourth low-interest credit card with a credit limit of $15,000, your overall credit limit will go up to $30,000. If you still owe $10,000 on your cards, your aggregate credit utilization will go down to 33% ($10,000/$30,000), which will make your credit score go up.

      2. Increasing single card utilization rates can decrease credit score

      When you transfer all of your credit card balances to a low-interest card, it can “overload” that card with debt. What this means is that your ratio of use for that card will be flagged as above average and your credit score can go down as a result.

      How working with a debt relief company affects your credit score

      Working with a debt relief company allows you to settle debts with your creditors for less than what you actually owe. This may be a good option if you owe more than $10,000 in consumer debt but have not yet reached the point where a consumer proposal or bankruptcy is the only way out.

      While getting a better deal on your debts can mean you pay less back over time, it can also hurt your credit score for many years. This is why you should avoid settling your debts with a debt relief company if you can pay them off in full with other debt consolidation strategies. You should speak to a debt relief professional to find out more if this option makes sense for you.

      Pros and cons of debt consolidation

      Pros

      • Can improve your credit score. Your credit score should start to go up once you start making regular and on-time repayments.
      • Fewer payments. It will be much easier to manage your debt since you’ll only have one easy payment to remember.
      • Lower interest rates. You might be able to get a lower interest rate when you consolidate your debt, which will save you money over time.
      • Pay your debt off faster. 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

      • Can lower your credit score temporarily. You may notice a temporary hit to your credit score, especially if you do a credit card balance transfer.
      • Potential upfront fees. You could end up paying a number of different fees such as origination fees, balance transfer fees or annual fees to consolidate your debt.
      • Higher interest rates. You might end up with a higher interest rate than you had to pay for your original debts if your credit score has gone down over time.
      • Not guaranteed to fix your debt problems. You could struggle to keep your spending habits in check which could lead you further into a cycle of debt.

      Tips for consolidating debt without hurting your credit

      While everyone’s situation is different, there are a few ways to lessen the impact to your credit while you consolidate your debt.

      • Pay off your revolving debt first. Revolving debts like credit cards tend to have a higher impact on your credit score than installment loans. Prioritizing a zero balance on your revolving debts could help to increase your credit score faster.
      • Make more than the minimum payment. If your situation allows for it, you should try to pay more than the required minimum on your consolidated loans. This will make sure that more of your payment goes to your principal instead of just covering interest.
      • Make on-time payments. Making on-time payments shows creditors that you’re serious about getting your credit score back on track. You can also consider consolidating with a credit builder loan so that your payments are automatically reported to the credit bureau.
      • Apply for a limited number of products. Only apply for loans or credit cards that you know you’re qualified for. Doing this will help you avoid multiple hard pulls on your credit, which can negatively affect your credit score.

      What does getting a “hard pull” on your credit mean?

      Getting a hard pull on your credit means that a lender has asked the credit bureau for information about your credit history. You typically have to authorize this type of credit check – and it will stay on your credit report for several years. If you have many hard inquiries, it can affect your credit score as it signals to lenders that you could be in financial trouble.

      Compare options for consolidating your debt

      Compare loan options

      1 - 5 of 5
      Name Product Interest Rate Loan Amount Loan Term Requirements
      LoanConnect Debt Consolidation Loan
      5.99% - 46.96%
      $500 - $35,000
      12 - 60 months
      Requirements: min. credit score 300
      GOOD CREDIT
      goPeer Personal Loan
      8.00% - 34.00%
      $1,000 - $25,000
      36 - 60 months
      Requirements: recommended income $40,000/year, no payday loan debt, min. credit score 650, min. 5-year credit history. (Avg. approved rate of 15.80%)
      SkyCap Financial Personal Loan
      19.99% - 39.99%
      $500 - $15,000
      9 - 60 months
      Requirements: min. income $1,666/month, full time employment/pension, min. credit score 575, no bankruptcy
      Mogo Personal Loan
      9.90% - 46.96%
      $200 - $35,000
      6 - 60 months
      Requirements: min. income $13,000/year, min. credit score 500
      Loans Canada Debt Consolidation Loan
      5.4% - 46.96%
      $300 - $50,000
      4 - 60 months
      Requirements: min. credit score 300
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      Compare balance transfer cards

      Name Product Balance Transfer Rate Balance Transfer Fee Purchase Interest Rate Annual Fee Min. Credit Score Description
      BMO CashBack Mastercard
      0.99% for the first 9 months (then 22.99%)
      2%
      20.99%
      $0
      Min. recommended credit score: 660
      Get 5% cash back on all eligible purchases in the first three months of card membership (up to max. spend of $2,500). Plus, get a rate of 0.99% on balance transfers for 9 months. A 2% fee applies to transferred balances.
      Tangerine World Mastercard
      1.95% for the first 6 months (then 19.95%)
      3%
      19.95%
      $0
      Min. recommended credit score: 600
      Earn 15% cash back (up to $150) when you spend $1,000 in the first 2 months Until January 31, 2023. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
      Tangerine Money-Back Credit Card
      1.95% for the first 6 months (then 19.95%)
      3%
      19.95%
      $0
      Min. recommended credit score: 600
      Earn 15% cash back (up to $150) when you spend $1,000 in the first 2 months Until January 31, 2023. Plus, get a 1.95% interest rate on balance transfers for the first 6 months.
      BMO Preferred Rate Mastercard
      0.99% for the first 9 months (then 12.99%)
      2%
      12.99%
      $0 annual fee for the first year ($20 thereafter)
      Min. recommended credit score: 660
      Get a rate of 0.99% on balance transfers for 9 months with a 2% transfer fee. Plus, get the $20 annual fee waived in the first year.
      BMO Rewards Mastercard
      0.99% for the first 9 months (then 22.99%)
      2%
      20.99%
      $0
      Min. recommended credit score: 725
      Get a bonus of 10,000 BMO Rewards points when you spend $1,000 in the first 3 months. Plus, get a rate of 0.99% on balance transfers for 9 months. A 2% fee applies to transferred balances.
      BMO AIR MILES Mastercard
      0.99% for the first 9 months (then 22.99%)
      2%
      20.99%
      $0
      Min. recommended credit score: 660
      Get 800 AIR MILES Bonus Miles (enough for $80 towards purchases with AIR MILES Cash). Get a rate of 0.99% on balance transfers for 9 months. A 2% fee applies to transferred balances.
      Scotia Momentum No-Fee Visa Card
      0% for the first 6 months (then 22.99%)
      N/A
      19.99%
      $0
      Min. recommended credit score: 660
      Earn 5% cash back on all purchases for the first 3 months (up to $2,000 spend). Plus, get a 0% introductory interest rate on balance transfers for the first 6 months with no balance transfer fee. Apply by April 30, 2023.
      Scotia Momentum Visa Card
      0% for the first 6 months (then 22.99%)
      N/A
      19.99%
      $39
      Min. recommended credit score: 660
      Get a 0% introductory interest rate on balance transfers for the first 6 months. (22.99% after that; annual fee $39). Offer ends January 31, 2023
      RBC ION Visa
      22.99%
      N/A
      20.99%
      $0
      Min. recommended credit score: 660
      Earn 6,000 Avion points when you get approved for the card. Apply by April 3, 2023.
      RBC ION+ Visa
      22.99%
      N/A
      20.99%
      $48
      Min. recommended credit score: 660
      Earn 12,000 Avion points when you get approved for the card. Apply by April 3, 2023.
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      Consolidating your debt with good vs bad credit

      You may have a different experience with consolidating debt depending on whether you have good or bad credit.

      • Consolidating with good credit. You’ll likely get better interest rates for debt consolidation if you have a good credit score. This can make it a very suitable option if you’re looking to pay less interest and get a more manageable payment.
      • Consolidating with bad credit. Consolidating your debt with bad credit can be a little bit more tricky. You’ll want to make sure you get a loan with favorable rates so that you don’t end up paying more in the end than you would if you kept your debts individually. Find out your options for debt consolidation loans with bad credit.

      Other options for those struggling with debt

      • Enlist a cosigner. Ask a friend or loved one with good credit to help you cosign a debt consolidation loan so you can get a better interest rate.
      • Apply for a secured loan. Put up collateral such as your home or vehicle to lower your interest rates (but make 100% sure you can pay it off so you don’t lose your asset). Compare secured loans.
      • Government subsidies. Try to qualify for low-income funding programs like income support, affordable housing or disability support to rely less on credit to survive.
      • Credit counselling services. Search for the credit counselling society in your province to get help with exploring your options for debt relief.
      • Borrowing from friends or family. If you’re swamped with debt, sometimes it can help to reach out to family and friends for support.

        Bottom line

        If you’re missing payments or scrambling to pay off your debts every month, then you could benefit from consolidating your debts. Learn more about the different types of debt consolidation and find out how your credit score will be affected with each one.

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