Debt Consolidation
Simplify your situation by grouping your debts together to make one payment.
  1. Debt Consolidation
  2. 4 Common Debt Consolidation Mistakes & How to Avoid Them

4 Common Debt Consolidation Mistakes
& How to Avoid Them

by Kelly Gabriel

After months of stress from a growing pile of credit card statements and a continuous stream of aggressive collections calls and letters, maybe you’ve decided that is your best option for turning over a new leaf.

Lumping all the money you owe into a single debt through debt consolidation may feel like a big relief. After all, you don’t need to stay on top of multiple creditors, you aren’t missing payment due dates or deadlines, and there isn’t the fear of steep interest rates going up even more.

But you aren’t in the clear yet — a debt consolidation loan is only the first step in the process of getting your personal finances under control and getting out of debt. You still have major strides to make in your journey to become debt-free. While it’s tempting to relax once you’ve taken the steps to consolidate your credit card or other debt, if you aren’t careful you could end up worse off than before you consolidated.

Here are 4 common debt consolidation mistakes to beware of and what to do instead:

Not Fully Understanding How You Got Into Debt
Mistake 1

Even if you get out of debt, if you don’t understand and learn from how you got into it in the first place, then you risk making the same mistakes in the future.

Debt consolidation can be a Band-Aid solution because you simply deal with the one monthly payment and keep trucking on with your spending. If you don’t carefully consider how you ended up with a mountain of debt that you couldn’t manage, you might never change the habits that got you into this situation.

Most debt consolidations cover at least $10,000-$15,000. It not only took time to get into that much debt, but it also took time to realize you were struggling to pay it back. That’s why when you consolidate debt, you need to acknowledge the severity of the situation and take a closer look at how you got there.

Avoid Debt Consolidation Mistakes

The Fix: Improve Your Money Management System

Debt consolidation is a good time to clean up your finances and reflect on how you manage your money. Recognize how you got into this position, what it’ll take to get you out of it, and how to ensure it won’t happen again.

  • Figure out your vulnerabilities and triggers — do you turn to impulse buying with online shopping too much or tap away on your credit card for lunch and snacks during your workday?
  • Comb through credit card statements, bills, receipts, and other expenses to create a detailed breakdown of your spending. This will help you better understand what the culprits might have been. Also get into the habit of tracking your spending to see where your money goes. Most people who honestly track their spending are surprised!
  • Once you’ve noticed the negative patterns, carve out a plan or budgetand stick to it. This will be your strategy to avoid the spending pitfalls that got you into bad financial shape.

Not Considering All Your Consolidation Options
Mistake 2

There’s no single, one-size-fits-all way to consolidate your debts. There are plenty of consolidation options for you to choose from. These can range from moving all your credit card debts onto a single card in a balance transfer, putting them onto a line of credit, or applying for a secured or unsecured loan with the bank.

Because so many people struggle with debt, other lesser-known debt assistance options are also available that don’t involve applying for more credit. These include a Debt Management Program, a debt relief option which consolidates the payments of all of your unsecured debt into one affordable monthly payment, and a Consumer Proposal, which consolidates and reduces your debt. While a Debt Management Program is a private and confidential option for people who are struggling with their debt, a Consumer Proposal is a legal process and form of insolvency that should only be used after other options have been explored first.

Where to Get Help to Consider All Your Debt Relief Options

When you’re looking for a debt consolidation loan and debt relief options, it’s very helpful to first meet with one of our non-profit credit counsellors to ensure you know everything you need to about your debt. A credit counsellor will also help you put together a realistic budget to make sure your spending stays within your income, help you explore options and solutions to get out of debt, and give you a plan to deal with your debt within a reasonable time frame.

Unfortunately, many people don’t become debt-free quickly with consolidation loans. Without making changes to their spending, it’s normal for them to continue spending more than they earn and build up more debt at the same time they’re trying to pay down their consolidation loan. Working out a realistic budget with a credit counsellor and sticking to their plan to get out of debt helps people avoid this common problem.

The Fix: Weigh the Pros and Cons of Each Debt Consolidation Option

When consolidating debts, some people are too eager to set the wheels in motion with the first debt relief option that appeals to them, but it’s worth looking at all the routes you can take and weighing their pros and cons.


Balance transfers, for example, could come with incredibly low interest rates at the start. However, the fine print can reveal pricey upfront fees, conditions to meet, and how long the promotional interest rate will apply. You must pay off all your consolidated debt before the promotional period is up to take advantage of the low interest rate. This is completely unrealistic for most people.

It’s important to do your homework and crunch every number before settling on the best choice for you and your finances. Carefully consider the longer-term effects of your decision as well, since some options can leave you with bad credit for many years after you’ve paid back your debts. You can always ask a professional credit counsellor about the pros and cons of any options you’re considering.

Choose the Right Debt Consolidation Plan for You

Figure out what you need to consolidate by listing your outstanding debts and their interest rates. You might find that some of your debts don’t actually need to be consolidated and should remain separate. Examples include a loan at a very low interest rate or a government student loan where the interest can be offset on your income taxes. It’s better to pay off credit cards or utility bills with small balances owing than consolidating them.

It’s okay to feel overwhelmed with the idea of doing all of this. Whenever you need help, contact us and a credit counsellor will guide you through the process.

Not Changing How You Use Credit
Mistake 3

If debt consolidation isn’t done right, it can backfire. Let’s use credit card consolidation as an example. When you pile all your credit card debt onto a single card or another loan, you effectively free up thousands of dollars in your wallet. If you’re a spender, there’s a chance you could turn to your cards again, causing the problem to start anew.

However, if you want to turn over a new leaf, it would be wise to limit your access to credit and limit your temptation to spend. If you tend to use your line of credit instead of your chequing account, ask your lender to change your credit line to “deposit only” status. This allows you to make payments but not spend the available credit.

You can close and cut up any credit cards you don’t need if you think that’s the discipline you need, or you can put your credit cards on ice – literally freeze them in a big block of ice in your freezer. Then when you get the urge to use them, you’ll have time to think twice about your decision while the ice thaws.

The Fix: Think Long-term with Your Credit Score

Closing credit accounts will lower your credit score temporarily but maintaining a poor payment pattern will do worse damage. A little short-term pain can be worth a long-term gain. Your best bet is to keep a single card open, typically the one with the best and longest credit history. Hang onto this card for emergencies, but call the credit card company and lower its limit if you’re worried that you’ll start spending again.

How Credit Scores Are Calculated in Canada

While it’s true that closing many credit accounts at once may take a toll on your credit score, that’s better than keeping the door open to excessive spending. Bad credit doesn’t last forever if you don’t let it. Your credit will naturally improve as you pay down your debt, and you can always apply for another credit card or loan once your financial situation has improved.

Not Having a Specific Pay-Off Date for the Debt Consolidation
Mistake 4

Depending on which debt consolidation option you chose, you could find yourself only making minimum payments every month. This might be part of what got you into debt in the first place, so you don’t want to spend forever trying to become debt-free. And if you add on more debt, then the journey will only get harder.

With some types of debt, there are defined deadlines. When debt repayment plans are carved out by credit counsellors, for example, the consumer and creditors agree that the debt will be repaid within 3-5 years. If your financial institution approves you for a debt consolidation loan, each payment brings you closer to a zero balance.

But balance transfers or lines of credit are handled on your own. You need to manage your budget in a way that allows you to diligently make payments to bring your balance owning down. When budgeting, figure out how much money you can realistically repay every month and automate that payment through your online banking.

Where to Find Money to Save and Pay Towards Debt Each Month

Stay accountable throughout the process and set checkpoints so you can see how you’re doing. You might even learn you’re ahead of schedule or decide that you want to pay off your debt consolidation faster, with a refund from your tax return, for example, or a tweak to your budget to increase your payments.

Worried About Debt Consolidation Mistakes You Can’t Afford?
We’re Here to Help

While the point of debt consolidation is to simplify your debts and make repaying them easier and cheaper, choosing the right strategy can be complicated and expensive if mistakes are made. That’s why we’re here to help. Our credit counsellors are experts at guiding Canadians through their debt problems and towards the right solutions. Reach out to us toll-free at 1-888-527-8999, send us an email, or chat with us anonymously online. Our appointments are free, confidential, and don’t obligate you to anything further – you’ve got nothing to lose but your debt.

Not sure which option is right for you?

Get answers from an expert.

With so many debt consolidation options out there, it can feel overwhelming to try and find the right one by yourself. One of our professional credit counsellors would be happy to guide you through this process by carefully reviewing your whole financial situation with you and answering any questions you have. Speaking with our certified counsellors is always free, confidential and without obligation.

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