Debt Consolidation Do’s and Don’ts

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Debt Consolidation Canada - Smarter Loans

All You Need to Know About Debt Consolidation in Canada

Most adults have several lines of credit and eagerly take advantage of debt consolidation to save money. Consolidation also provides the convenience of paying just one bill a month to cover them all. One distinction of debt consolidation is that it combines unsecured debt. So, although a consolidation plan does not include secured credit like mortgage loans and automobile loans, it definitely plays a big role in helping people better manage repayment of money they’ve borrowed.

Consolidating debt can be a solid financial strategy and a key element to getting and keeping a healthy credit score and savings plan. The following information about debt consolidation will be helpful when making sound decisions about managing unsecured credit.


Highlights include:

  1. Debt Consolidation FAQs
  2. Types of Debt Consolidation
  3. Benefits of Consolidating Debt
  4. When Combining Debt May Not Be Ideal
  5. Alternatives to Debt Consolidation
  6. Do’s and Don’ts


Debt Consolidation FAQs

As mentioned, it is common for most people to have more than one line of unsecured credit, usually in the form of credit cards. Each credit card company sends a statement each month, usually due on different days of the month. The basis of debt consolidation is to combine the balances on these credit cards into a single card and make one payment. This is also known as a balance transfer; all balances are put on a zero-interest credit card (or at least a card with a much smaller interest rate).

However, credit cards are not the only form of debt that can be combined. Other unsecured debt that can be consolidated includes:

  • Medical bills
  • Utility bills
  • Personal loans
  • Retail credit
  • Pay day loans
  • Student loans

Debt consolidation is offered by banks, credit unions and online lending companies. Applicants should shop around for the best rates and fees. They will need to gather their bills and credit information before applying for a loan consolidation. There are a couple of different consolidation choices, depending on the debt (and sometimes the amount owed).


Types of Debt Consolidation

The two major types of debt consolidation are:

  1. Debt Consolidation Loans. As the name indicates, this means borrowing the amount of the total of all unsecured debt and paying it off in one bundle. Credit card transfers (mentioned above) fall into this category, but these loans can also take the form of personal loans.

Best use: Decent credit improves the chances of getting approved for debt consolidation loans. Repayment of some debt may take longer, since all credit card balances are rolled together in one payment, even the cards with smaller balances which could have been repaid faster. Paying off this loan on time can increase the borrower’s credit score because less debt is owed.


  1. Debt Management Plan (DMP). These plans are often non-profit organization based. How they work is by matching the borrower with a credit counselor to get an assessment of the borrower’s debt and how much they can pay each month. Debt counseling is also made available. The agency helps negotiate a lower interest rate with creditors. They also make a case to the creditors to waive any late fees, which keeps payments affordable.

Best use: DMPs are primarily used by borrowers who have a large amount of unsecured debt (some experts say at least $3,000) and an inability to make large monthly payments. The plan usually takes between 3 and 5 years to pay all creditors completely. DMPs may have a negative impact on credit scores while in process, but the rating raises when the debts are paid off.


Debt consolidation is not limited to individuals. Worldwide, business use debt consolidation to manage loans and lines of credit they owe. In addition to decreasing the number of bills which need to be paid each month, consolidation has other benefits.


Benefits of Consolidating Debt

Even people who pay their bills online save time by having to sign in to just one account and pay for 3,4, 5 (or more) bills. With today’s overflowing schedules, saved time is a coveted commodity. Debt consolidation is the time saving gift that keeps on giving month after month. It also provides:

  • The possibility to have lower monthly payments
  • An opportunity to start an emergency savings using the interest saved
  • A faster way to become debt free
  • Protection of a good credit rating
  • Improvement of credit score once debts are paid


When Combining Debt May Not Be Ideal

The appeal of debt consolidation may sound tempting, but it is not always a good idea. For instance, offers to transfer credit card debt to one card is not helpful if the next year, the interest rate on the new card shoots up above the interest the borrower was paying. This is another reason it pays to read the fine print on any credit offer.

Similarly, if a borrower intends to use a credit card with a zero balance (because it was transferred to another card), debt consolidation is not the answer. Continuing to use the card results in more debt at higher interest, which the opposite of what debt consolidation is intended to accomplish.


Alternatives to Debt Consolidation

There are other creative ways to consolidate unsecured debt. They include drawing money from a whole life insurance policy and using the proceeds to pay the balances. Another way is to borrow against retirement savings. Some people have been known to secure a home equity line of credit for this purpose. These may not be the best options, since they can put retirement money, or even a home, at risk if not paid.

There is another alternative that is an even worse option-bankruptcy. Extreme circumstances can lead to bankruptcy being a necessity, but on the whole it is better to avoid this choice. Bankruptcy is not really debt consolidation at all, in fact it is proof of a borrower’s inability to pay debt. Bankruptcy can stay on a credit report for up to ten years, making it get hard to get credit without paying an extreme amount of interest, if a borrower can get approved at all with such a huge dent on their credit report.

With determination and effort, it is possible to make a do-it-yourself plan to consolidate debt. People who use this method commit to paying cash, rather than credit, to make all or most purchases. They pay down card balances one at a time, starting with the one with the lowest balance. When each is paid, they choose to keep the one with the lowest interest and throw away the rest.


Do’s and Don’ts

There are many factors that influence which road to choose for debt consolidation. As always, knowledge and patience result in the best outcomes. Here are a few tips about consolidating debts:

  • Do consider debt consolidation if it will improve credit management.
  • Do learn everything possible before choosing the method to use.
  • Don’t transfer credit card balances and then use the zero-balance cards.
  • Do not place a good credit score, home, or retirement at risk by taking on more debt.
  • Do make a long-term commitment to see the consolidation to the end.
  • Don’t confuse debt consolidation with debt settlements, in which the lender agrees to take less than the amount of money owed. The impact on credit ratings is huge and remains for years.
  • Do get in touch with a credit counselor if debt becomes overwhelming.


The wise consumer takes advantage of the benefits offered by a debt consolidation which serves their best financial interest. The first step to making this decision is an honest evaluation of the current financial situation. With that information at hand, borrowers can get solid assistance with consolidating and paying off debt.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.