Debt Consolidation FAQs: Definitions and Basics

Feeling overwhelmed by the endless jargon around debt consolidation in Canada? You are not alone. Consolidating your debt with home equity is a major financial decision. This is why you must understand the definitions and basic mechanics of debt consolidation, so you can feel confident and informed throughout the process.

Our team at 360Lending created this three-part guide to cut through the noise and give you the foundational knowledge you need to borrow responsibly. This first part breaks down the essential Definitions and Basics of debt consolidation.

Once you have a foundational understanding, you can explore our other guides on:

• Debt Consolidation FAQs: Requirements and Application Process

• Debt Consolidation FAQs: Costs, Benefits, and Alternatives

What's the Difference Between Good vs. Bad Debts?

Good debt is money borrowed to invest in an asset that has the potential to increase your net worth or future income, such as a mortgage, a student loan, or a business loan. Bad debt is typically a high-interest expense on something that quickly depreciates in value, like credit card balances or loans for luxury goods.

Are There Government Programs to Help with Debt?

While the Canadian government does not offer free grants for personal debt, it federally regulates programs like the Consumer Proposal and Bankruptcy. These legal options, filed through a Licensed Insolvency Trustee, allow you to reduce or eliminate unsecured debt, offering a structured path to financial relief and creditor protection.

Is Debt Consolidation the Same as Debt Settlement?

No, they are fundamentally different debt strategies. Debt consolidation is restructuring debt into one loan with a lower interest rate, where you pay back 100% of what you owe. Debt settlement is negotiating to pay back only a portion of the debt, which often causes more severe damage to your credit score.

How Does Debt Consolidation Work in Canada?

Debt consolidation works in Canada by combining multiple high-interest debts (like credit cards and loans) into a cheaper source of financing. This new financing, often a home equity loan, HELOC, or mortgage refinance, is used to pay off all the existing creditors at once. The borrower is then left with one monthly payment, usually at a significantly lower overall interest rate, simplifying finances and saving money.

How Much Can You Save with Debt Consolidation?

Savings vary significantly based on your old interest rates and new loan terms. Generally, our clients see their monthly payments reduced by about 50%. For example, by consolidating $50,000 of high-interest credit card debt into a lower-rate mortgage product, clients often save around $750 per month, or $9,000 per year.

How Does Credit Utilization Affect Your Credit Score?

Credit utilization is the second most important factor in your credit score, typically accounting for 30% of the calculation. It measures the percentage of your total available revolving credit that you are currently using. A high ratio suggests high risk and will lower your score, while maintaining a low ratio demonstrates responsible debt management and boosts your score.

How to Fix an Error on Your Credit Report?

To fix an error on your Canadian credit report, you must first obtain your full reports from both Equifax and TransUnion. Once an error is found, you file an official dispute (online is fastest), providing supporting documents that prove the item is incorrect. The bureau is legally obligated to investigate the claim with the creditor and resolve the issue within 30 days.

Does Debt Consolidation Hurt Your Credit in Canada?

No, when managed correctly, debt consolidation does not permanently hurt your credit score; it often improves it. By paying off high-interest balances, you immediately reduce your Credit Utilization Ratio (a major credit factor). While the initial hard credit check may cause a temporary, minor dip, consistent, on-time payments on the new, simplified loan will quickly boost your score.

What Happens After Debt Consolidation?

After debt consolidation, your most critical task is budgeting to ensure long-term success. Consolidation lowers your monthly payment, but it is not debt forgiveness. You must immediately redirect the freed-up cash flow into a strict budget to prevent new debt accumulation, build an emergency fund, and accelerate the payoff of your consolidated loan.

What Types of Debt Cannot Be Consolidated?

Most debts can be consolidated, including high-interest credit cards, personal loans, and payday loans. However, typical consolidation loans cannot include your primary first mortgage. Secured debts like mortgages generally require a specific product, such as a mortgage refinance or a second mortgage, to be paid off or combined.

Is Debt Consolidation a Good Idea if I Have Bad Credit?

Yes, it is often a good idea. Even if you face higher interest rates, consolidating debt with poor credit can significantly reduce your payments and your credit utilization ratio (by paying off high-balance accounts) and helps your credit score improve within 60 to 90 days of your unsecured debts being paid.

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