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Debt Consolidation: How It Influences Your Credit?

Excessive personal debt can be frightening —especially if you feel like you’re alone. There are several debt remedies, such as debt consolidation that can be considered. Nowadays, one of Canada’s major concerns is how debt consolidation can affect your credit score? The debt ratio in Canada (the debt ratio owed against how much surplus revenue households have) rose to 170.7 percent as of 3Q 2020. Canadians also have a lot of questioning about debt. Various debt relief options are available at York Credit.

What does debt consolidation mean?

Debt consolidation consists of the combination of several smaller loans into a single debt or payment (i.e. “consolidated”). Often this can be called “debt refinancing.” In certain situations, a reduced rate of interest is used to consolidate high-interest loans, making payments smoother because the debt is not going to rise too much. There are two different ways to consolidate the debt:

Debt Consolidation Loans

Lenders (such as a bank) offer debt consolidation loans where several smaller debts are combined under a single loan. The bank provides a loan to the customer that is sufficient to pay their borrowers’ unpaid debts. The objective of a consolidated loan is to reduce the overall interest rate on all loans where several debts are being paid off with a single loan so that the total debt load is amortized over a longer period. The purpose of a debt consolidation loan is to reduce the impact of the total debt burden on individual assets.

Debt Consolidation Programs

Debt Consolidation programs (DCPs) are a substitute for debt consolidation payments, several forms of unsecured debt are bundled into a single recurring payment that includes credit card debt, unpaid bills, and payday loans. The payment is processed by a program offered by a non-profit credit counseling agency, like Credit Canada, and a debt consolidation service. DCPs are often referred to as DMPs (debt management plans) or debt consolidation plans, as they are nearly similar.

How does it impact your credit?

When you apply for a debt consolidation loan, some factors will affect your loan:

  • It generates a “hard inquiry” into your loan: In the short term, this will decrease the credit score.
  • Debt Consolidation Loans Open a new item in your credit report: Any “new” credit item could temporarily reduce your credit, as it poses a new threat.
  • The credit utilization rate is improved by Debt Consolidation Loans.

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