Does Debt Consolidation Hurt Your Credit? Canadian Mortgage Broker Explains

Debt Consolidation Explained

Debt consolidation is a way to pay off multiple debts by taking out a new loan to pay off the existing ones. It's often used to consolidate high-interest debt, such as credit card balances, into a single payment with a lower interest rate.

When you consolidate debt, you take out a new loan to pay off your existing debts. This means that you'll have a single monthly payment to make, rather than multiple payments to different creditors. This can make it easier to manage your debt and stay organized.

Using a Mortgage to Consolidate Debt

One way to consolidate debt in Canada is by refinancing your mortgage. This means taking out a new mortgage for a larger amount than you currently owe and using the extra money to pay off your other debts. This can be a good option if you have a lot of debt and you own a home because mortgage interest rates are usually lower than credit cards or other types of loan interest rates.

Why Debt Consolidation Usually Improves Credit

So, does debt consolidation hurt your credit? The short answer is no, debt consolidation does not hurt your credit. In fact, it can actually help your credit in several ways.

1. Consolidating your debt can help you pay off your debts faster. When you have multiple debts with different interest rates, it can be difficult to keep track of them all and pay them off in a timely manner. By consolidating your debt, you can make a single payment each month and pay off your debts faster.
2. Consolidating your debt can lower your credit utilization ratio. This is a measure of how much of your available credit you are using. For example, if you have a credit card with a limit of $5,000 and you have a balance of $4000, your credit utilization ratio is 80%. Lenders like to see a low credit utilization ratio because it shows that you're not relying too heavily on your credit. When you consolidate your debt, your balances are no longer close to their limit, which can help lower your credit utilization ratio and improve your credit score.
3. Consolidating your debt can help you avoid missed or late payments. If you have multiple debts with different due dates, it can be easy to lose track of when each payment is due. This can lead to missed or late payments, which can damage your credit score. By consolidating your debt, you'll have a single payment to make each month, which can help you avoid missed or late payments and protect your credit.

Conclusion

Debt consolidation does not hurt your credit in Canada. In fact, it can actually help your credit by allowing you to pay off your debts faster, lower your credit utilization ratio, and avoid missed or late payments. If you're struggling with high-interest debt and are considering consolidating your debt, it's a good idea to talk to a financial advisor or mortgage broker to see if it's the right option for you.