Debt Consolidation

Does Debt Consolidation Hurt Your Credit?

Does debt consolidation hurt your credit? Ultimately, it depends on various factors, including how you manage your loan and your overall financial activities.
Bruce Hodges
November 2, 2023
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Table of Contents

Does Debt Consolidation Hurt Your Credit?

Canadians who are struggling with multiple debt payments often consider debt consolidation as a strategy to regain control over their finances. A debt consolidation loan can simplify your payments and potentially save you money, but many wonder about how it will affect your credit score. While any financial action can have implications, understanding the nuances associated with debt consolidation loans is key to making the right choices for your financial health.

Key Takeaways:

  • Debt consolidation loans may cause slight, short-term dips in your credit score.
  • In the long-term, debt consolidation may actually help to improve your credit score, but it all depends on how you manage it.

Short-Term Impact vs. Long-Term Gain

Initially, a debt consolidation loan may cause a slight dip in your credit score. This is due to the hard inquiry on your credit report that lenders perform to assess your creditworthiness. Hard inquiries are performed for any credit request, including debt consolidation loans, car loans, mortgage loans, and more. They stay on your credit report for 2 years. 

Additionally, opening a new account will affect the average age of your credit accounts, which can impact your score. These are 2 factors that cause a debt consolidation loan’s short-term impact on your credit score.

However, it’s important to consider the long-term gain that may balance out this dip. 

What’s the best way to consolidate debt without hurting credit?

It’s important to think carefully about any decision regarding your debt and credit, including debt consolidation. In order to consolidate debt without hurting your credit long-term, ensure that your new arrangement will actually result in better payment consistency and financial health.

At Parachute, by consolidating your debts at a lower interest rate, we help our customers save an average of $300 a month. This improved cash flow can be crucial in making timely monthly payments, which is a significant factor in credit scoring. Plus, we only conduct a hard hit to a customer's credit score once we are certain we will be able to approve them, so we are sure the score will bounce back as long as no additional debt is taken on and payments continue to be made.

The Pros and Cons

There are different pros and cons of debt consolidation that can help you evaluate the overall impact on your credit score. Keep in mind that both the pros and the cons can vary depending on your specific financial situation.

Pros of Debt Consolidation

  • Debt consolidation combines multiple debts into a single monthly payment, streamlining the repayment process and making it easier to manage.
  • Consolidating debts may lead to a lower overall interest rate, potentially saving money on interest payments over time.
  • With a consolidation loan, you have a structured repayment plan, making it easier to budget and plan for debt elimination.
  • If managed responsibly, debt consolidation can have a positive impact on your credit score over time.

Cons of Debt Consolidation

  • Consolidating debt doesn't eliminate the root causes of financial challenges. Some individuals may be tempted to accumulate new debt after consolidating, exacerbating the situation.
  • Debt consolidation may not be suitable for all types of debts. For example, if the majority of your debts have low-interest rates, consolidation may not result in significant savings.
  • If you use a secured loan for consolidation and are unable to make payments, there is a risk of losing the collateral, such as your home or car.

Building Credit Responsibly

Successful debt consolidation revolves around responsible use of credit and making consistent, on-time payments. By concentrating your high-interest debts into one loan with a lower rate and monthly cashflow savings, you'll be better positioned to keep up with payments, which ultimately has a positive effect on your credit score.

It's essential to use debt consolidation as a part of a broader financial strategy, which should include budgeting, building savings, and planning for future financial goals.

The Parachute Advantage

Parachute stands apart from traditional debt consolidation options in several ways. Here's how our approach can positively affect your credit:

  • Cashback Incentives: We offer up to 10% cashback on your loan when you complete actions that boost your financial wellness—creating an additional incentive to stay on track.
  • No New Lines of Credit: Unlike some lenders, we don’t tempt you with more credit. We’re here to consolidate your current debts, not add to them.
  • Better Financial Standing: At the end of your loan term with Parachute, you should find yourself in a better financial position, with a stronger cash flow, better interest rates available to you, and an improved credit score.
  • Savings and Flexibility: With loans from $5000 to $25,000, we offer flexible payments and terms of 30 to 60 months, with rates that are far more favourable than predatory high-interest credit options.

When used correctly, debt consolidation through Parachute should not hurt your credit in the long run. On the contrary, it's a strategic step towards financial wellness. It's about creating a manageable plan that reduces your overall debt burden while simultaneously setting you up for a stronger credit score in the future.

Is it a good idea to consolidate debt?

The decision to consolidate debt is highly personal and depends on your situation. As a general rule of thumb, consolidating debt can be a good idea if you can secure a lower interest rate than your current debts and if you possess the financial discipline to make consistent payments. It streamlines repayment, simplifies budgeting, and may result in cost savings over time. However, if the root cause of debt is overspending or financial habits, addressing these issues alongside consolidation is crucial for long-term financial health.

How long does a debt consolidation stay on your credit?

In regards to a debt consolidation loan, there is no specific “time” on your credit report. There are 2 main aspects that will impact your credit report:

  • Any hard inquiry for debt which is conducted when you apply, may cause a slight dip in your credit score and remain on the report for 2 years.
  • The opening of a new credit account (the debt consolidation loan is considered an account), which remains on your credit report and affects the average age of your accounts.

The general impact of a debt consolidation loan on your credit score tends to lessen over time with consistent payments and responsible credit usage.

Does debt consolidation affect buying a home?

Debt consolidation can impact your ability to buy a home, and the extent of the impact depends on various factors. On one hand, consolidating high-interest debts and improving your overall financial picture may positively affect your credit score, making you a more attractive borrower. This could potentially help you qualify for a mortgage with a favourable interest rate. 

However, on the other hand, if you use certain forms of credit, such as a home equity loan or line of credit, to consolidate debt, it could increase your debt-to-income ratio and affect your mortgage application. Lenders consider your overall financial health, including your debt levels, when assessing your eligibility for a mortgage. It's crucial to carefully evaluate the terms of any consolidation method and consult with a mortgage professional to understand how it may impact your ability to buy a home.


Ultimately, whether or not a debt consolidation loan will hurt your credit depends on various factors, including how you manage your loan and your overall financial activities. Parachute is designed to help you come out on the other side with an improved financial situation, and as a result, a healthier credit score.

While a debt consolidation loan from Parachute won’t give your credit score an immediate boost, it's designed to provide lasting, long-term benefits to your financial health. It's about more than just temporary relief—it's a step toward a more stable financial future. If you're exploring options for managing your debt more effectively, consider speaking with a Parachute advisor to see how we can support your journey towards financial freedom.

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.
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