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Debt consolidation services can hurt your credit

Debt consolidations services state that they can reduce your debt and repair your damaged credit.

Be very wary when you hear that.  I have many clients who have travelled that path and their credit has been ruined.  But the debt consolidation companies don't warn you about that.

Let me explain.  Equifax Canada is a credit reporting company that Canadian credit granters and lenders use to evaluate the credit worthiness of Canadian borrowers.  Every month, creditors report to Equifax about what accounts you have and whether you have paid your bills on time.  It shows credit inquiries, collection activity, bankruptcies, payment activity, etc.

A lender likes to see that you have a reasonable number of accounts open, such as Visa, MasterCard, car loans, etc., and that you pay these accounts as agreed upon.

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If the creditors report that you have missed payments, Equifax lowers your credit score. 

To avoid paying large amounts of debt, some folks declare bankruptcy.  Equifax reports that information, and lenders are very nervous about people who have "run away" from paying bills by declaring bankruptcy.  And that information stays on your credit report for 6 years.  (A second bankruptcy stays on your report for 14 years).

If you go to a debt consolidation company, and they tell you that they will negotiate with creditors to reduce your debt in half, be very careful.  Some call it a debt consolidation program.  Another name is a consumer proposal.

True, you will have reduced your debt in half, or perhaps even more.  But the creditor will report to Equifax that a settlement has been reached.  That is the same effect as bankruptcy.  Effectively, you have "run away" from a large portion of your debt.  Consumer proposal debt reduction stays on your report for 3 years.

And consumer proposal reporting reduces your credit score dramatically.  You will not be able to obtain good mortgage rates or open credit accounts with a poor credit score.

Sometimes you may feel that a settlement or a consumer proposal is the only way to go, but keep in mind that your credit score will take a beating for a number of years.

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