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Credit repair vs Debt consolidation: Which is better?

5 min read

credit repair

Written By

Rachel Surman

Between high-interest credit card debt, student loans, and general post-pandemic stressors, it's not uncommon for Canadians to find themselves burdened with debt. Fortunately, there are several approaches to help you regain control over your finances and improve your credit.

Options like debt settlement, credit repair, and debt consolidation can help manage debt. Knowing what to do to consolidate credit card debt makes the process easier to understand. Let's explore the pros and cons of each, so you can weigh your options and make an informed choice.

What is debt settlement?

Debt settlement is when you work with a company to negotiate with creditors to pay off a debt for less than the full amount owed. When you settle debt, you're asking creditors to accept less than you owe. If you and the creditors come to an agreement, you can settle the debt by making either a lump-sum payment or a series of installments. For example, if you owed $25,000 on a credit card and could scrape up $15,000 in cash, you could try to settle for that amount.

What are the legal implications of a debt settlement?

While it isn’t a formal legal process, there are still legal implications when it comes to a debt settlement. The terms and conditions of your settlement will be outlined, so be sure to review carefully before signing any documentation.

In some circumstances, debt settlement is an appealing alternative to bankruptcy or a consumer proposal. A consumer proposal is a formal, legally binding document that can only be administered by a Licensed Insolvency Trustee (LIT) in Canada. With a consumer proposal, your creditors can't take legal action against you once you've reached an agreement, but your credit score is severely negatively impacted.

Can a debt settlement impact my credit score?

A debt settlement can potentially impact your credit score. Debt settlement could affect your credit score in the short term due to missed payments (since you'll stop making regular payments while you negotiate a settlement) and you’ll have a"settled" status on your credit report.

That said, it can indirectly contribute to improving your credit score over time by reducing your overall debt burden and delinquent credit accounts. As you settle debt and lower your debt-to-income ratio, creditors may view you more favourably.

Steps to negotiate a debt settlement

Debt settlement is a feasible process in Canada if you're struggling with unpaid debts and are looking for ways to consolidate credit card debt. Here’s your step-by-step guide to negotiating a debt settlement.

  • Contact the creditor: Begin by exploring the possibility of settling the debt. You can do this by email, phone, or sending a written request for documentation

  • Your creditor will review your request: They can either accept your settlement offer, decline it, or propose an alternative arrangement. If they offer a counterproposal, evaluate whether the proposed amount aligns with your budget.

  • Arrange payment: Once you and the creditor reach a settlement agreement, arrange for payment. Depending on the creditor's conditions, payment terms can vary, including a lump-sum payment or multiple installments.

  • Settle the debt: The remaining balance is cleared when a debt is settled. For unsecured debts like credit cards, be prepared for the possibility of account closure, potentially affecting your credit score due to previous late payments.

Remember, creditors are not required to negotiate or agree to your proposal, and in proposing a settlement means you need to have the money available to pay the agreed-upon amounts. If you don't have the cash to negotiate, pursuing a debt consolidation loan may be a better option for you.

What is credit repair?

Credit repair means improving your creditworthiness by correcting mistakes and discrepancies on your credit report. Fixing errors on your credit report could help improve your score and help you get better terms on financial products like loans and credit cards. It's essential to know how credit repair works and how to remove incorrect information from your credit history, and how a national credit reporting agency reacts to your credit management. So let’s dive in.

How does credit repair work?

Credit repair involves checking your credit report and challenging incorrect details. You can do it on your own by checking your credit report and reporting discrepancies to the credit bureau. But, it’s often easier to team up with an experienced credit repair company that understands the process and can communicate effectively with lenders and credit bureaus.

How do I remove incorrect information from my credit history?

To remove incorrect information from your credit history in Canada, follow these steps:

  • Obtain your credit report: Start by obtaining a copy of your credit report from one of the major credit bureaus in Canada, such as Equifax or TransUnion.

  • Review your report: Carefully review your credit report to identify inaccuracies, errors, or outdated information. Common inaccuracies include incorrect personal details, accounts you didn't open, or incorrect account statuses.

  • Dispute errors: If you find inaccuracies, dispute them with the credit bureau. Provide evidence, such as statements or correspondence, to support your dispute.

  • Contact your creditors: Contact the creditor associated with the incorrect information. Request that they update or correct the data they reported to the credit bureau.

  • Follow up: Keep records of all communications and follow up with the credit bureau and creditor to ensure the inaccuracies are resolved.

  • Be patient: Credit bureaus must investigate your dispute within a reasonable time frame (usually 30 days).

Removing incorrect information requires time and patience, but it's essential for maintaining an accurate credit history in Canada.

Opportunities and challenges faced when repairing credit

When deciding to repair your credit, looking at the opportunities and challenges of credit repair first is important.

  • Opportunities: Credit repair should be able to improve your overall financial well-being. Successful credit repair can lead to financial stability, increased access to credit, and improved borrowing terms. It also allows for debt management, offering an opportunity to manage and resolve outstanding debts, reducing financial stress. Effective credit repair can help you establish or rebuild your credit history, and you'll learn about credit management in the process.

  • Challenges: Credit repair, if done alone, is time-consuming, and the results may take time. You also may temporarily negatively impact your credit score as you settle debts. It also requires disciplined financial habits to maintain a positive credit history. Be sure to watch out for any credit repair scams that promise instant results.

There are no overnight fixes when it comes to credit repair. It takes time and a consistent effort to improve your credit score – but it's a viable option to help manage credit card debt or other types of debt.

What is debt consolidation?

Debt consolidation means combining several debts into one loan, typically with a lower interest rate. This makes handling your finances easier because you only need to make a single monthly payment instead of juggling multiple ones. Whether you're able to save money on interest over time will depend on the length of the loan repayment term and whether you pay fees on the loan, such as an application or origination fee.

A debt consolidation loan can either be secured or unsecured. Secured debt consolidation loans mean you'll need to offer one or more assets as collateral. These assets could include your home, car, retirement savings, or insurance policy. For instance, if you decide to use a home equity loan for debt consolidation, your home would serve as collateral to secure the loan. The key is to know how consolidating your debt will change your monthly payments and overall interest.

How do I merge multiple debts into one?

There are two types of debt consolidation – a loan or a balance transfer credit card.

  • Debt consolidation: Debt consolidation loans are a type of personal loan that allows you to merge various kinds of debt, such as medical bills, credit card balances, or other loans.

  • Balance transfer cards: A credit card that permits you to move multiple debts onto the card. Some cards offer a special 0 percent interest rate for a limited time, potentially saving you money if you can pay off your debt during the promotional period.

Having a good credit score makes it easier to qualify for debt consolidation. However, obtaining a debt consolidation loan with a lower credit score might still be possible if you explore specific lenders or offer collateral to secure the loan.

How does debt consolidation impact my monthly payments and overall interest?

Debt consolidation in Canada can significantly impact your monthly payments and overall interest expenses. Here is how it works:

  • Monthly payments: Debt consolidation generally reduces your monthly payments. When you merge multiple debts into a single loan or credit card with a lower interest rate, you often end up with a more manageable monthly payment.

  • Overall interest: Debt consolidation can also decrease your overall interest costs. If the new loan or credit card offers a lower interest rate than your existing debts, you'll pay less in interest over time.

Your success with consolidating debts depends on a few factors – such as the interest rate you qualify for, the length of the consolidation loan, and how you handle credit. Also, if you extend the repayment period, you may pay more interest over the long term, even with a lower interest rate.

What's the role of credit use if I’m consolidating debt?

Practice responsible credit use when consolidating debt. Avoiding excessive credit card usage and maintaining a reasonable credit utilization ratio is essential to protect your credit score. Timely payments on consolidated loans or credit cards also contribute positively to your credit history and score.

We know it’s tough, but try your best to avoid taking on more debt while working towards paying off consolidated balances. Having an emergency fund can provide a safety net for unexpected expenses, and regular credit monitoring ensures you track progress.

Pros and cons of credit repair services

Credit repair has its advantages and disadvantages. Let's dive into both so you can make the right financial decision for your situation.


  • Enhances likelihood of approval: Repairing your credit can increase your chances of getting approved for loans or credit cards, giving you better access to financial options in the future.

  • Increased credit limit: A repaired credit history may lead to higher credit limits, allowing you more flexibility in managing your finances.

  • Lower interest rates: With an improved credit score, you're more likely to qualify for loans and credit cards with lower interest rates, which could save you money in the long run.

  • Improves job prospects: Some employers may check credit reports during the hiring process, and better credit can enhance your job prospects.


  • High cost: Credit repair services can be expensive, involving monthly fees and potentially adding up to a significant cost over time.

Be sure to explore both DIY options and reputable credit repair agencies to make a decision that's aligned with all of your financial goals.

Pros and cons of debt consolidation

Just like credit repair, debt consolidation also has its advantages and disadvantages. Let's take a look at both.


  • Single, lower monthly payment: Consolidating debts usually results in a single, more manageable monthly payment, making budgeting easier.

  • Simplified money management: Managing one debt account is less complex than juggling multiple loans or credit cards, reducing the chances of missed payments.

  • Possibly lower interest rates: By securing a consolidation loan with a lower interest rate, you could save money on interest payments over time.

  • Potential for a payoff date: Debt consolidation can offer a clear path toward becoming debt-free, as it often comes with a set payoff date to work towards.


  • May increase the overall payment duration and cost: Extending the repayment period, which can happen with consolidation, may lead to paying more interest over time, potentially increasing the total cost of your debt.

Carefully consider the pros and cons and explore your available debt consolidation options, or reach out to a financial advisor for help.

Frequently asked questions

What are the differences between debt consolidation and credit repair?

Debt consolidation involves combining multiple debts into a single, often lower-interest loan, simplifying payments and potentially reducing interest costs. It doesn't directly address negative items on your credit report. On the other hand, credit repair focuses on improving your credit history by disputing inaccuracies, errors, or discrepancies on your credit report and adopting responsible credit habits. While credit repair can lead to better credit, it doesn't reduce the total amount you owe.

What are the effects of debt settlement on credit reports?

Debt settlement can have a mixed impact on credit reports. On the negative side, it often results in a lower credit score due to not fully meeting the original debt obligations and the settlement appearing on your credit report. But, debt settlement does reduce outstanding debts, which could significantly improve your overall financial health. Over time, as you maintain responsible financial behaviour and make timely payments, your credit score should gradually recover.

What are the effects of debt settlements on credit reports?

Debt settlements can have both positive and negative effects on credit reports. On the downside, settling a debt typically results in a lower credit score because it involves not repaying the full amount originally owed. Also, the settled account may be marked as "settled" or "settled for less than the full amount" on your credit report, which can be viewed negatively by creditors. But, by eliminating or reducing outstanding debts, you'll be on your way to improving your overall financial health.

What are the chances I get scammed during credit repair or debt consolidation?

While there is a risk of being scammed during credit repair or debt consolidation, you can protect yourself by conducting thorough research on companies, checking their credentials, and asking questions about their services and fees. Avoid upfront fees and be cautious of promises that seem too good to be true. Trust your instincts, and verify the company's contact information to reduce your risk of falling victim to scams.

What are the proper ways to manage my credit score?

Properly managing your credit score is essential for maintaining your financial health. Here are the top three strategies recommended by credit reporting agencies:

  • Check your credit reports: Regularly review your credit reports from the major credit bureaus. Look for inaccuracies or errors and dispute them promptly.

  • Manage credit utilization: Keep your credit card balances low relative to your credit limits to keep your credit utilization ratio low. High credit utilization can hurt your score.

  • Pay your bills on time: Consistently pay all your bills, including credit cards, loans, and utilities, on time. Late payments can negatively impact your credit score.

Get expert help managing, settling, or consolidating debt

Choosing the right professional help is a pivotal step in effectively managing, settling, or consolidating debt. To navigate this process, it’s best practice to engage reputable financial advisors, credit counsellors, Licensed Insolvency Trustees (LITs), and established financial institutions with expertise in credit building and debt management. When it comes to credit repairing, exercise caution to prevent being scammed – especially regarding consultations that promise quick fixes or request upfront fees.

Many financial institutions in Canada provide options like a debt consolidation loan or credit counselling services. Compare and assess factors like terms, interest rates, and fees to make an informed and financially sound decision that aligns with your specific needs and long-term goals.

The bottom line

Understanding the concepts of debt settlement, credit repair, and debt consolidation is crucial if you're looking to improve your financial well-being. There are many options available, but your solution will depend greatly on your personal circumstances, like if you can afford professional help to repair your credit or can make debt consolidation payments.

If you're looking for a comprehensive solution to help you manage credit and improve your financial well-being, KOHO can help. With savings like budget tracking, automated savings, and cashback rewards, KOHO provides a user-friendly platform to manage finances efficiently. Plus, the prepaid card allows users to build a credit history by reporting responsible card usage to the credit bureaus.

KOHO also offers a specific Credit Building tool to help build your credit history.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!


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