Credit card consolidation: a guide

Posted on 31 May 2023

Written by Graeme Hamilton

Battling with unmanageable credit card debt? Got multiple credit cards and finding it difficult to stay on top of each of the payments? Credit card consolidation could be a good option for helping to simplify your debt, along with having a number of other benefits. Credit card debt consolidation is the process of condensing multiple credit card debts into one so you have just one payment to make. Simplifying multiple debts can be a huge stress relief, and can save you longer term in interest payments. The thought of taking out a credit card debt consolidation loan can be intimidating, but in this guide we explain all you need to know about your options in Canada so you can make the right decision for you and your financial circumstances.

When is credit card consolidation a good idea?

There are a number of reasons to consider credit card consolidation:

  • It is increasingly difficult to stay on top of your monthly credit card payments, particularly with a rising cost of living
  • High interest rates on top of credit cards are costing you more
  • You are living paycheque to paycheque and paying off your credit cards with other forms of debt
  • You cannot stop on top of all of your debts, leading to missing payments
  • You are reverting to payday loans to help with debt problems or payments you cannot afford

These are a few examples of instances where a credit card consolidation may help to simplify and reduce your payments.

What is credit card consolidation?

Credit card consolidation is the process of taking out a new loan in order to condense multiple credit card debts into one. The funds from the new loan pay off the other separate credit card debts which are then closed, and you are left with just one payment to make each month. Debt consolidation loans typically have a lower interest rate than the other individual credit card debts you have will charge you. You might even find more preferable terms and conditions, like longer repayment periods to lower each monthly payment you make. It simplifies your finances to make debts feel less overwhelming. Before you take out any credit card consolidation loan, you must be sure you can budget effectively to pay off your loan, otherwise it could actually end up increasing your debt. Equally, if you are behind on your credit card payments, it could be difficult to secure a debt consolidation loan – in this scenario, you may want to consider a debt relief alternative like a consumer proposal.

What are the pros and cons of consolidation?

Credit card consolidation comes with a range of pros and cons. Here are the pros:

  • A single, simplified monthly payment
  • Often a more favourable interest rate, or elimination of an interest rate
  • Sometimes payments can be reduced and spread across a longer period of time

Here are the cons:

  • You need to qualify for a new debt consolidation loan
  • If you cannot budget for your payments effectively, your debt could become worse
  • Debt consolidation loans often require collateral, which can put huge assets like your home at risk

Types of credit card consolidation

In Canada, there are a few different types of credit card consolidation. Each is suited to different individuals depending on their financial circumstances. Here is a breakdown of the most popular types:

Credit card balance transfer

It is possible to take out a new credit card and consolidate any existing credit card debts into the new one. Advantages of this include benefiting from promotions that come with credit cards, although these can come with terms and conditions to be aware of. Credit card balance transfers can be flexible too – you can tackle your credit card debt, but if you have a financially challenging month you could always revert to simply making your monthly payment. One thing to be aware of with this method is that even if a new credit card has a low interest rate when consolidating existing debts, the low rate may not be applicable to any new purchases. You will also need to commit to being able to make each of your monthly payments, otherwise you could find yourself facing fees and mounting debt.

Advantages of a credit card balance transfer:

  • Flexible payments
  • Initial low interest rate

Disadvantages of a credit card balance transfer:

  • You must be eligible for a new credit card
  • It could elongate the time you are in debt
  • Promotional interest rates might garner your interest but they can expire quickly
  • Subsequent interest rates can be very high

Home equity line of credit

A second mortgage or a home equity loan is when you borrow against any equity you have in your home and use it to pay off debt. Before you increase your mortgage, take out a second mortgage with a higher interest rate, or apply for a home equity loan, you should speak to a Licensed Insolvency Trustee. As the only professionals in Canada legally able to file all forms of debt relief, they can share any other options available to you, which may be able to reduce or eliminate your debt instead of adding to it.

Advantages of a home equity line of credit:

  • Low interest rate if taken out via a financial institution or credit union
  • Flexible payment scheduling

Disadvantages of a home equity line of credit:

  • High fees and high interest rate if taken out via a subprime lender
  • Requires sufficient equity in your property

Informal debt settlement

When you are struggling financially and you do not think it will get better in the next few years, you may want to consider a settlement if you have a lump sum of cash available. A debt settlement is an arrangement you negotiate with your creditors to pay back less than the full amount you owe, often via a one off lump sum. Because you are paying upfront, creditors will sometimes agree to eliminate the remaining credit card debt. This means you can pay less than the full amount owed and become free from the debt. It is worth noting that not all creditors will accept this approach, and you would need to have the cash ready immediately. An informal debt settlement is also not guaranteed, so you should try to get any agreement in writing where possible. Even then, a creditor is not tied to it legally.

Advantages of an informal debt settlement:

  • Potential to repay less than you owe
  • If creditors agree, you can gain instant debt relief

Disadvantages of an informal debt settlement:

  • Creditors need to agree to a negotiation
  • No formal agreement, meaning creditors are not bound
  • Lump sum required before an offer is made
  • Credit rating can be affected for years

Consumer proposal

A consumer proposal is a legal form of debt settlement, which can reduce credit card debt by up to 80%. Filed through a Licensed Insolvency Trustee, filing a consumer proposal is the process of putting forward an affordable monthly payment figure to your creditors. Your Licensed Insolvency Trustee will help to negotiate with your creditors on your behalf. A popular bankruptcy alternative, if your creditors accept your proposal, you only need to repay the agreed amount for a period of up to five years. Other advantages of a consumer proposal include receiving full protection from your creditors, and relief from the stresses associated with overwhelming credit card debt. At Spergel, we have a 99% acceptance rate on any consumer proposals we file, which means you have a 99% chance of reducing your debts by up to 80%.

Advantages of a consumer proposal:

  • Interest and penalties are frozen
  • Reduction in your credit card debt by up to 80%
  • Protection from your creditors via a stay of proceedings
  • Collection on student loan debts paused
  • Avoids bankruptcy

Disadvantages of a consumer proposal:

  • Consumer proposals are a permanent public record
  • A negative impact on your credit report for up to around 8 years
  • If you miss more than 3 payments, your consumer proposal is finished and you cannot file another

If you are unsure of which form of credit card consolidation may be best for you, book a free consultation with a Licensed Insolvency Trustee at Spergel. It can feel overwhelming choosing a form of debt consolidation, but we can guide you through the process by reviewing your financial situation and advising you on the best recommendation for your circumstances. Reach out today – you owe it to yourself.


Graeme Hamilton

Graeme Hamilton is a Chartered Insolvency and Restructuring Professional with over 10 years’ experience as an LIT (Licensed Insolvency Trustee). He is also Spergel's resident expert on bankruptcy and debt relief in the Ontario region. Prior to establishing his career in the insolvency industry, Graeme lived in Cambodia doing volunteer work with NGO's.

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