Does debt consolidation ruin credit?

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Debt consolidation in Canada might nudge your credit score down initially due to new loan inquiries, but it has long-term perks. By reducing credit balances and making timely payments, your credit score can improve. Keep old accounts open to enhance your credit history. For a personalized debt strategy, consulting an expert is advisable. Reach out via phone, text, or live chat if you have any questions.

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Debt Consolidation Credit Question

Does debt consolidation ruin credit? I’m thinking of consolidating my debt and want to know if it will harm my credit score in Canada.

From: Anonymous Question
Location: Red Deer, Alberta (AB)
Category: debt consolidation

Debt Consolidation Credit Answer

Debt consolidation in Canada can be a bit of a rollercoaster for your credit score. In the short term, taking out a consolidation loan or jumping into a balance transfer might knock your score down a notch due to hard inquiries on your credit report. Plus, opening a new account could lower the average age of your credit history. And let’s not forget, if you decide to close any old accounts, your available credit takes a hit, potentially hiking up your credit utilization rate—ouch!

But before you start fretting, there’s a sunny side. Once the dust settles, debt consolidation can be your credit score’s best friend. By lowering balances on revolving credit, you can improve your credit utilization ratio, giving your score a nice little boost. And if you consistently make those payments on time, your payment history—another big kahuna in credit scoring—gets a glowing review. The trick is to keep those old accounts open to preserve your credit history and steer clear of piling on new credit inquiries. For a plan that’s tailor-made for you, chatting with a pro might be your best bet.

From: Insider Scott

Office of the Superintendent of Bankruptcy (OSB) Answer

Debt consolidation itself does not inherently ruin your credit score in Canada. However, the impact on your credit score depends on how you manage the process and your overall credit behavior.

If you consolidate your debts into a single loan, it may lead to a small, temporary decrease in your credit score due to the hard inquiry when applying for the new loan and the change in your credit utilization ratio. Responsible management of the consolidation, including timely payments on the new loan, can improve your credit score over time.

It’s important to note that if the consolidation involves a consumer proposal, these are formal insolvency processes that will significantly impact your credit score for a longer duration, as outlined in the Bankruptcy and Insolvency Act (RSC 1985, c. B-3) and related regulations.

Therefore, while debt consolidation itself can help in managing debt and potentially improving your credit practice, the overall effects on your credit will vary based on your specific financial actions following consolidation.

From: OSB Helper

Related Questions to Debt Consolidation Ruining Credit

Here are the top 5 most frequently asked questions related to the impact of debt consolidation on credit, based on current trends and concerns:

1. How does debt consolidation affect my credit score?

Debt consolidation can both positively and negatively affect your credit score, depending on factors like payment history, credit utilization, and new credit inquiries.

2. Will applying for a debt consolidation loan hurt my credit?

Yes, applying for a debt consolidation loan can temporarily lower your credit score due to the hard credit inquiry and the opening of a new credit account.

3. Can debt consolidation improve my credit utilization ratio?

Yes, debt consolidation can improve your credit utilization ratio if you consolidate credit card debt into a personal loan or line of credit, reducing the amount of revolving credit being used.

4. How long does debt consolidation stay on my credit report?

Debt consolidation itself does not stay on your credit report, but the new loan or credit account will be reported, and any missed payments or account closures can impact your credit report for several years.

5. Is debt consolidation better for my credit than a consumer proposal or bankruptcy?

Generally, debt consolidation is less damaging to your credit than a consumer proposal or bankruptcy, but it depends on your ability to make payments and manage the consolidated debt effectively.

If you have a question about debt see our debt questions or ask your own debt related question.

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