Debt Consolidation

Can Debt Consolidation Help Bad Credit?

Debt consolidation helps bad credit by streamlining payments and lowering interest rates, allowing you to save money and pay off debt faster.
Bruce Hodges
April 5, 2024
Apply to Parachute and start your journey to financial wellness.
Apply now
Table of Contents

Can Debt Consolidation Help Bad Credit?

Consolidating your debt can improve your credit score if new payment terms are more manageable.

Debt consolidation is the process of combining multiple debts into a single, more manageable loan with one payment. It can help you recover from a low credit score by simplifying your payments and lowering interest rates. However, you need to make sure that the new rates are realistic for your budget and that you can commit to making payments over the long term.

The Cycle of Bad Credit and High-Interest Debt

Struggling with multiple debts can be a major source of stress and impact your daily life. Whether it’s a mortgage, credit card debt, or student loans, these obligations can quickly spiral out of control when burdened with high interest rates. 

Missing payments or carrying a high balance on credit cards can negatively impact your credit score, making it even harder to qualify for favourable loan rates in the future. This creates a vicious cycle: bad credit leads to high-interest debt, and high-interest debt makes it difficult to improve your credit score.

A credit score below 560 is considered “poor credit” in Canada, according to Equifax. Securing favourable rates becomes even more difficult in this situation, so it’s important to carefully consider your next steps to minimize further damage to your score.

How Does Debt Consolidation Help Bad Credit?

  1. Convenience: Managing a single monthly payment is far easier than keeping track of multiple debts with different due dates and minimum payments. This simplifies your financial life and frees up mental space to focus on other areas. Your financial habits will define your financial future, so if payments are something you struggle with, debt consolidation could help you.
  1. Potentially Lower Interest Rates: Consolidation loans may offer lower interest rates compared to some credit cards or other high-interest debts like payday loans. It can lead to significant savings in the short and long term, allowing you to pay off your debt faster and free up more money in your budget. At Parachute, customers save an average of $300 a month, allowing them to free up cash flow and reach their goals faster.
  1. Rebuilding Your Credit Score: Making consistent, on-time payments on a debt consolidation loan can improve your credit score and help you qualify for better rates in the future.

Note that taking out a new loan for debt consolidation will trigger a hard inquiry on your credit report and cause a temporary dip in your credit score. However, the long-term benefits of on-time payments and lower interest rates typically outweigh this short-term effect.

Consolidating Debts with Bad Credit: Things to Consider

The best approach depends on your unique financial situation, so keep the following factors in mind:

  • Comparing costs: Don't just focus on the Annual Percentage Rate (APR) but also consider origination fees, servicing fees, and any prepayment penalties.
  • Consider the benefits offered by lenders: Consider what value a lender may offer beyond better rates.For example, Parachute offers a habit-building platform, cash-back rewards, and allows you to pay off the loan early without additional fees.
  • Consider your ability to pay:  Can you commit to the monthly payments of the consolidation loan? Missed payments will further lower your credit score and make it even harder to manage your debt. Carefully assess your budget and ensure the new payment is within your means. 


Debt consolidation can help bad credit, but finding a plan that fits your budget is essential. Every situation is different, so it’s important to weigh your options and compare short-term and long-term impact.

Regardless of the strategy you choose, it’s still important to develop good financial habits. By combining a solid debt management plan with responsible spending, you'll be well on your way to breaking free from the cycle of bad credit and high interest.

Parachute is the only debt consolidation loan in Canada that rewards you with cash-back along the way, helping you get ahead faster. You can check your eligibility for a loan up to $25,000 here.

Bruce Hodges
Bruce, Founder and CEO of Parachute, worked for several of Canada’s top Banks, published research for the Canadian Bankers Association, and taught E-commerce Strategy in Wilfrid Laurier University’s MBA program. His first start-up built credit solutions for the likes of National Bank, Fair Isaac, and Ford Credit globally. Prior to starting Parachute, Bruce was COO of Foresters Financial, and EVP Transformation at CIBC, one of Canada’s top 5 banks. Bruce founded Parachute to disrupt the financial wellness space taking on payday, and high interest predatory lenders, with the intent to bring at risk Canadians back from the brink to good financial health.
Follow us:

More from our blog:

Start your path to financial well-being today.
Get a loan that gives you cash-back.

We truly believe financial well-being should be accessible to all Canadians. Our three step program empowers, educates, and rewards our customers. We offer the only loan where someone can leave with more savings than when they started.

Parachute is not a a bankruptcy, consumer proposal or debt management proposal company.
© 2022 WHF Inc. All rights reserved. and the designs are trademarks of White Hat Financial Inc. (‘WHF’) and used here under licence.