Does Debt Consolidation Hurt Your Credit?

Caitlin
Author:
Caitlin
Caitlin Wood, BA
Editor-in-Chief at Loans Canada
Caitlin Wood has more than a decade of experience helping Canadian consumers learn how to take control of their finances. Expertise:
  • Personal finance
  • Consumer borrowing
  • Credit improvement
  • Debt management
Priyanka
Reviewed By:
Priyanka
Priyanka Correia, BComm
Senior Editor at Loans Canada
As a senior member of the Loans Canada team, Priyanka Correia is committed to empowering Canadians with the knowledge they need to make smart financial choices.
Expertise:
  • Personal finance
  • Consumer borrowing
  • Consumer banking
  • Debt management
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Updated On: July 31, 2025
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Consolidating your high-interest debt can save you plenty of money spent on interest charges. It can also help you pay off debt sooner. But what effect can consolidating your debt have on your credit score?  Will it change your credit score or affect your ability to get a loan in the future? 

Keep reading to find out if your credit health can be impacted by debt consolidation, whether good or bad.


Key Points

  • There are multiple ways to consolidate debt, including debt consolidation loans, balance transfers and debt management programs.
  • Each option can impact your credit negatively; however, each option will impact you in different ways.
  • That said, while your credit may be negatively affected, debt consolidation can also help improve your credit score over time.

Does Debt Consolidation Hurt Your Credit?

Yes, consolidating your debt can initially hurt your credit score, but it can also have a positive impact on it. Moreover, there are different ways you can consolidate your debt and depending on the option you choose, the impact on your credit will vary.

Here’s a table of the main ways you can consolidate your debts and its impact on credit.

Credit Impact
Debt Consolidation LoanThis option may negatively impact your credit score due to hard inquiries when applying for a debt consolidation loan. Opening a new credit account may also reduce your credit account age. Similarly, if you close any old accounts after consolidating your debt, you can also lower your credit account age.
Balance TransferUsing a balance transfer to consolidate credit card debt can negatively impact your credit in two ways:
– Closing old accounts after a transfer may hurt your credit history length.
– Applying for a credit card balance transfer may result in a hard inquiry, which usually causes a temporary dip in credit.
Debt Management Program (DMP)When you enter a DMP, you’ll receive an R7 credit rating on the accounts consolidated in the program, which negatively impacts credit. This remark will stay on your report for 2 years after completion. 

What Are Debt Consolidation Loans?

A debt consolidation loan involves taking out a new loan that has better terms and a lower rate to repay your other debts, particularly high-interest debts. This leaves you with one single loan, saving you interest charges and making debt management much easier.

Can A Debt Consolidation Loan Hurt Your Credit?

  • Hard Inquiry: The hard inquiry likely needed to qualify for a debt consolidation loan may result in a temporary dip in your score.
  • Opening A New Account: Opening a new credit account can lower your average account age, which may slightly reduce your credit score since the average age of your credit contributes to your score.
  • Closing Any Old Credit Accounts: Again, your average credit age may shrink by closing old credit accounts, which may negatively affect your credit score.

Can A Debt Consolidation Loan Improve Your Credit?

  • Credit Utilization Ratio: Consolidating your maxed-out credit cards with a debt consolidation loan may lower your credit utilization ratio, which can have a positive effect on your credit score.
  • Debt Repayment: As you make payments on your debt consolidation loan, you’ll be able to build a positive payment history, which can help improve your credit.
Note:
It typically requires good credit to qualify for a debt consolidation loan. If you have bad credit, you may need a co-signer to qualify.

Balance Transfers

A balance transfer can be a useful way to consolidate your debts on your own. This involves moving the balance from a high-interest credit card to one with a lower rate. If you can pay down your debt within the low-rate promotional period, you can save a lot of money in interest charges.

While this strategy has its perks, it’s important to choose a card with both a low interest rate — or even 0% interest — and low transfer fees. You’ll also want to ensure you can repay your debt within the introductory period. Further, since balance transfers typically come with costs, steep fees can cancel out the potential savings. 

Can A Balance Transfer Hurt Your Credit?

  • Cancelling Old Credit Accounts: Cancelling a long-held credit card after a balance transfer can negatively impact your credit score. That’s because credit scoring models consider both the overall length of your credit history and the age of your oldest account. Keeping older accounts open helps maintain a stronger, more established credit profile, while closing an account can do the opposite.
  • Hard Inquiry: To get approved for a new credit card, you will likely need to undergo a hard inquiry. This may also result in a small and temporary dip in your score.

Can A Balance Transfer Help Improve Your Credit?

  • Pay Down Debt Faster: Using a balance transfer can encourage more disciplined repayment habits, helping you tackle your credit card debt faster. Over time, this approach may lead to an improvement in your credit score.

Debt Management Programs (DMP)

If your financial problems are too much for you to handle, and a simple debt consolidation loan isn’t enough to help, or you can’t qualify for a debt consolidation loan, you may consider a more aggressive approach, like a debt management program. With this strategy, you’ll work with a credit counsellor, who will negotiate with your creditors to reduce your interest rates, fees, or payment amounts by extending the period of time to repay the debt.

A debt management program allows you to consolidate your debts into one manageable monthly payment plan. Do note that a DMP does not eliminate or reduce your overall debt owed; it simply makes it more manageable. You’re still paying back all of your debts through a DMP.

A debt management program may be a better option than a debt consolidation loan because your credit score isn’t taken into consideration. So, even if you have a low credit score and can’t qualify for a debt consolidation loan, you can still consolidate your debts through a DMP.

Can A Debt Consolidation Program Hurt Your Credit?

  • R7 Credit Rating: When you enter a DMP, you’ll be given an R7 credit rating, which will show up on your report as “making regular payments through a special arrangement to settle your debts”.
  • Stays On Your Credit Report: A DMP will remain on your credit report for 2 years after you complete the program, during which time your credit score will be affected.

Can A Debt Consolidation Program Help Improve Your Credit?

  • Payments: While a DMP can negatively affect your credit in the short run, it can also positively affect your credit in the long run, as long as you make the right financial decisions. As you pay off your debts and make timely payments, you’ll be building your payment history and reducing your debts, which can help your credit score.

Can I Consolidate Debt When I Have Bad Credit?

Your ability to consolidate your debts with bad credit depends on the method you use to consolidate them. 

Debt Consolidation Loans

You generally need good credit to qualify for a debt consolidation loan. While there are lenders that offer loans to those with bad credit, the interest rate and terms you do qualify for may be unfavourable.
Credit Card Balance TransferTo qualify for a credit card balance transfer offer, you’ll typically require good to excellent credit. 
Debt Management ProgramAs mentioned above, a DMP is an informal arrangement made between you and your creditors through your credit counsellor. You are not being issued a new loan here, but are simply negotiating a new payment arrangement through your counsellor. As such, you can consolidate your debt through a DMP with bad credit. 

Learn more: Can I Get A Debt Consolidation Loan With Bad Credit?


Watch Out For Debt Consolidation Scams

If you’re looking for a debt consolidation loan and have bad credit, be wary of lenders who may have nefarious intentions, leaving you in a worse position than you were before. Here are a few scams to consider:

Debt Consolidation Loan Scams 

You should be wary of any lender who guarantees approval to those with bad credit. Legitimate lenders will never approve a borrower without conducting some sort of underwriting process.

Signs to look out for include the following: 

  • Upfront Payment Required: Your lender requests an upfront payment to process your loan application. They may also try to request an upfront payment under the guise of loan insurance or some other loan fee.
  • No Website Or Address: They have no online presence and/or have a lot of complaints against them.
  • Guaranteed Approval: You receive an unsolicited loan approval via email, text or phone call, without having gone through any vetting process.

Credit Repair Service Scams 

Credit repair services that claim to erase bad credit or improve credit fast are usually scammers looking to take advantage of unsuspecting borrowers looking for help.

Signs to look out for include the following:

  • Guaranteed Removal Of Negative Remarks: Any credit repair service that offers to remove legitimate or accurate information from your credit report is not a real credit repair company. No one can remove negative information from your credit report unless it is inaccurate information.
  • Strange Payment Requirements: If they ask you to make payments using gift cards or wire transfers, this is a red flag.

Does Debt Consolidation Make Sense For You?

There may be times when debt consolidation is the right choice, but it may not necessarily be appropriate in other situations:

When Debt Consolidation Makes SenseWhen Debt Consolidation May Not Be Right
You fix your spending habitsYou continue overspending after consolidating
You have good creditYou have bad credit
You’re financially capable of handling your loan paymentsYour income isn’t stable enough to handle a new loan
The rate on your new loan is lower than your highest-rate debtThe interest rate on the new loan is not lower than your current debts

Final Thoughts

A debt consolidation loan can be a good thing for your credit score, but it can also cause it to dip, depending on how it’s managed. Used wisely, it can actually improve your score by streamlining payments and reducing credit utilization. Plus, it can save you money and help you repay your debts sooner. The key is consistency: making timely payments and avoiding new debt can keep your credit score strong.


Debt Consolidation FAQs

Are credit card balance transfers free?

Transferring a balance from one card to another is not free. There are fees associated with this, typically a percentage of the balance. You will also be charged interest on whatever your balance is every month. Look for a balance transfer credit card that offers low fees or a low introductory interest rate.

Can I get a debt consolidation loan with bad credit?

Typically, debt consolidation loans require the borrower to have fair to good credit. If you have bad credit and want to consolidate your debt, consider a debt management program instead. 

What is a debt management program?

A debt management program allows you to consolidate your unsecured debts into one more manageable monthly payment. You work with a credit counsellor who will negotiate with your creditors and lenders to reduce your interest rates, fees, or payment amounts by extending the period of time to repay the debt. 

Does a debt consolidation loan hurt your credit score? 

Not necessarily. It may cause a small dip initially due to a credit inquiry and new account opened, but it can also improve your credit score over time if you make on-time payments.

Will consolidating debt show up on my credit report? 

Yes, your new loan will be noted on your report as a new credit account. Plus, any old accounts that you paid off may be marked as paid.

What happens if I miss a payment on my debt consolidation loan? 

Missed payments will be reported to the credit bureaus, which can damage your credit score. This is why it’s crucial to make sure your payments are made on time every month.
Caitlin Wood, BA avatar on Loans Canada
Caitlin Wood, BA

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over ten years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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