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If you're juggling credit card balances, personal loans, or other forms of high-interest debt, debt consolidation might sound like a smart way to get back on track. But many Canadians worry about how it will affect their credit score.

So, does debt consolidation hurt your credit?

The short answer is no. In fact, if you use your home equity to consolidate debt—through a second mortgage, HELOC, or refinancing—it can actually help your credit score in the long run.

Let’s break down how it works, what the credit score impact might look like, and how to set yourself up for success.

First, How Does Your Credit Score Work?

Before we talk about how debt consolidation affects your credit, it’s helpful to understand what makes up your credit score in Canada.

Here are the five main factors:

Payment history (35%) – Do you make payments on time?

Credit utilization (30%) – How much of your available credit are you using?

Credit history length (15%) – How long have you had credit accounts?

Credit mix (10%) – Do you have a variety of credit products?

New credit inquiries (10%) – Have you recently applied for new credit?

Out of all these, credit utilization and payment history have the biggest impact. And this is where debt consolidation—especially using home equity—can really help.

What Happens When You Consolidate Debt?

Let’s say you have $40,000 spread across five credit cards and lines of credit. You’re barely making the minimum payments and interest is piling up. So you decide to take out a home equity loan or HELOC for $40,000, and you use that to pay off all your existing debts.

Now you have:

One new loan or line of credit (secured by your home)

All your credit cards paid down to $0

One payment to manage instead of five

So what does that do to your credit score?

How Debt Consolidation Can Help Your Credit

Using your home equity to consolidate debt—whether it’s a second mortgage, HELOC, or full mortgage refinance—can actually improve your credit score in several ways:

1. It Reduces Your Credit Utilization

This is a big one.

Credit utilization looks at how much of your available credit you’re using. For example:

If you have $50,000 of available credit across your cards

And you’re using $40,000 of it

That’s 80% utilization

That’s considered high—and it can hurt your credit score.

Now imagine you take out a home equity loan for $40,000 and use it to pay off all those credit cards. Your balances drop to $0, and you’re using 0% of your available revolving credit.

That can give your credit score a major boost.

Most experts recommend keeping your utilization under 30%. The lower, the better.

Even if you don’t close your credit cards, just having low balances and lots of available credit works in your favour.

2. It Replaces Revolving Debt with Installment Debt

Credit cards and lines of credit are considered revolving credit—meaning the balance can go up and down, and there’s no fixed end date.

Home equity loans and mortgage refinancing, on the other hand, are installment loans. That means you borrow a set amount, and pay it off over time with regular payments.

Credit scoring systems treat these types of loans more favourably—especially when they’re paid on time. Replacing revolving debt with installment debt may help balance out your credit profile.

3. You’re Paying Less Interest, Which Helps You Stay Current

One reason people fall behind on debt is because high interest makes payments unmanageable. Many credit cards charge interest rates over 20%. If you’re only making minimum payments, your balance barely goes down.

Home equity loans and HELOCs typically have much lower rates—often between 8% and 12%, depending on your situation. Lower rates mean:

More of your payment goes toward the principal

You can get out of debt faster

You’re less likely to fall behind

And again, staying current = better credit score.

4. It Simplifies Your Payments and Reduces the Risk of Missed Payments

When you’re dealing with several different debts, it’s easy to forget due dates or fall behind. Missing just one payment can seriously hurt your credit score—and the damage increases the longer the payment goes unpaid.

Debt consolidation gives you one monthly payment to worry about. That makes it easier to stay organized, avoid missed payments, and build a stronger payment history over time.

Payment history is the most important part of your credit score. So simplifying your payments can lead to a more consistent, reliable credit profile.

What Could Hurt Your Score After Consolidation

Even though home equity debt consolidation can help your credit, there are a few pitfalls to watch out for:

Using your credit cards again after paying them off.

It’s tempting—but it defeats the purpose. If you build up your balances again, your utilization goes back up and your credit score could drop.

Missing payments on your new loan.

Whether it’s a HELOC or a refinanced mortgage, make sure you budget for the new payment. A late or missed payment can stay on your credit report for up to 6 years.

Closing credit accounts right after paying them off.

It may seem like a good idea, but closing old accounts shortens your credit history and lowers your available credit—both of which can hurt your score. Consider keeping your cards open with a zero balance.

Compare Different Options to Help Your Credit

All three of these options can help with debt consolidation—but they work slightly differently. Here’s how each one affects your finances and your credit profile:

1. Home Equity Loan

Using a home equity loan to consolidate debt gives you a lump sum of money up front, with a fixed interest rate and a fixed repayment schedule. It's like a traditional loan—but it's backed by your home.

Why it can help your credit:

Reduces your revolving debt: You can pay off multiple credit cards and only have one monthly installment.

Predictable payments: Fixed payments make it easier to stay organized and avoid missed payments, improving your credit history.

Lowers utilization ratio: By wiping out your credit card balances, you bring down your utilization significantly, which boosts your score.

What to watch out for:

If you continue to rack up credit card debt after consolidating, your score could take another hit.

Failing to make payments on your home equity loan could lead to default and foreclosure.

2. Home Equity Line of Credit (HELOC)

You can also use a HELOC to consolidate debt, similar to a lower interest credit card, but secured by your home. You can borrow as much or as little as you need (up to a limit), and you only pay interest on the amount you use.

Why it can help your credit:

Gives you flexibility: You don’t need to borrow more than necessary, helping you manage debt carefully.

Can lower your credit utilization: If you use a HELOC to pay off your credit cards, your overall utilization across revolving accounts goes down.

Boosts your available credit: Having a high-limit HELOC (even unused) can positively influence your utilization ratio.

What to watch out for:

Because it's revolving credit, overusing the HELOC can hurt your utilization ratio again if you’re not careful.

Interest rates can fluctuate—if rates go up, your payments might become harder to manage.

3. Mortgage Refinance with Cash-Out Option

In a refinance, you replace your existing mortgage with a new one, possibly with a better rate or different terms. If your home has increased in value, you can also borrow extra money against your equity—this is called a “cash-out refinance.” That extra cash can be used to pay off debt.

Why it can help your credit:

Lowers your interest rate: Refinancing often means you get better terms than credit cards or unsecured loans.

Pays off high-interest debt in full: The money from the refinance can be used to eliminate credit card balances and other debts entirely.

Improves credit score over time: Lower utilization + one consistent mortgage payment can boost your credit if managed well.

What to watch out for:

You’ll extend or reset your mortgage term, which may affect long-term interest costs.

You’ll need to qualify under stricter lending rules, especially after recent changes to mortgage stress tests in Canada.

How to Improve Your Credit After Consolidating

Once you’ve used home equity to consolidate your debt, the goal should be to maintain momentum and avoid falling back into old habits. Here are some practical ways to continue improving your credit score:

Make all your payments on time

Set reminders, use automatic payments, or budget around your new monthly obligation. Payment history is the #1 factor in your credit score.

Keep old credit accounts open (if there’s no annual fee)

Don’t rush to close your old credit cards. Having a long-standing account in good standing is positive for your credit history.

Use your credit cards lightly—but regularly

Put a small, recurring charge on one card (like a streaming subscription) and pay it off in full each month. This builds a healthy pattern of usage without carrying a balance.

Monitor your credit report

Check your credit report regularly (you can do this for free through Equifax or TransUnion) to make sure everything is accurate. Errors can hurt your score.

Stay below 30% utilization

Even if you keep a card open for emergencies, try not to use more than 30% of its limit. Low usage = strong