Loans for Canadians with bad credit: How to improve your score

The reality is that more and more Canadians are falling behind on credit payments. Thanks to the spike in inflation that occurred after the pandemic lockdowns were lifted, the cost of living across the country has ballooned. And credit card interest rates? They’re sitting at around 20% or more, which means even a small balance can turn into a monster rather quickly. In a recent Ratehub.ca survey, 50% of respondents said they had taken out a loan (student, auto or personal), and 41% carried debt over $1,000. (Ratehub.ca and MoneySense.ca are both owned by Ratehub Inc.)

Even if you keep up with your minimum monthly payments, credit card interest charges will eat into your progress; it’s like financial quicksand. But here’s the good news: you don’t need a perfect score to start turning things around. In this article, we’ll cover different options to get back on track, including debt consolidation, low-interest credit cards, and more.

Consolidating debts can mean lower interest fees

For some Canadians who are struggling to repay multiple debts, a debt consolidation loan may be the most optimal solution. With one loan, you can pay off those credit cards, swap your 20%-plus interest rate for something much lower, and then focus on making one predictable monthly payment. Throw in the occasional extra payment when you have a bit more cash, and you can really start to chip away at that debt mountain.

The “secret sauce” here isn’t just getting the loan—it’s picking the right one, with the right terms, and then paying it back consistently. A debt consolidation loan can be very effective for Canadians who want to stop drowning in debt AND boost their credit score. Read on for more details, plus other options to consider.

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Why does “bad credit” carry so much shame?

Many Canadians are uncomfortable talking about money and finances in general, let alone debt and bad credit.

Having bad credit or being in debt often carries a negative stigma, which can lead to feelings of shame. Because of this, people may avoid seeking help when their debt grows and spirals out of control. When this happens, people may turn to payday loans or other kinds of predatory lending with sky-high interest rates, which only makes things worse.

If you’re struggling with debt, you’re not alone. As of the second quarter of 2025, the average non-mortgage debt per Canadian consumer was $22,147, according to credit bureau Equifax Canada.

Bad credit and debt can make us feel like we are not in control of our lives—they can feel like a crushing weight on our chest that gets heavier with each passing day. While that shame can become unbearable, I’m here to tell you that there is a legitimate financial tool that can help you improve your debt situation and your credit score in one shot.

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Can borrowing actually be part of the solution?

It seems counterintuitive, doesn’t it? Taking on more debt to pay off your older debt? You’re not wrong, but when done correctly, debt consolidation loans can achieve the goals I mentioned earlier: paying down your debt while also improving your credit score. Still don’t believe me? Here’s how it works.

What is a debt consolidation loan?

In Canada, a debt consolidation loan is a personal loan you can take to combine your debts into one payment. Ideally, this will allow you to eliminate your high-interest debt in exchange for a single monthly payment with a lower interest rate. Instead of worrying about paying off a credit card, a student loan, and a car loan, you will only need to repay the debt consolidation loan.

This can simplify your financial situation and streamline your debt, with the bonus of saving you money with a lower interest rate. Most Canadian financial institutions can provide a debt consolidation loan, including banks, credit unions, and even online lenders.

How can a debt consolidation loan help rebuild your credit score?

Lower debt ratio: Your debt ratio is the amount of debt you carry compared to the amount of credit you have access to. This is a critical factor in determining your credit score.
Manageable payments: With a debt consolidation loan, you make one monthly payment, rather than juggling multiple payments for different debts. This can help you to budget your money and maybe even pay down your debt faster.
Pre-determined payment schedule: Debt consolidation loans also come with a clear fixed term and payment schedule. This allows you to have an end date in mind for paying off all of your debts.
Diversified credit mix: Interestingly enough, lenders like to see that people can handle different types of credit and manage them well. This can help improve your credit score.
Demonstrating responsible debt repayment: This is probably one of the biggest ways in which debt consolidation can improve your credit score. Consistently making payments on time shows that you’re reliable, and it can help give you a track record for future loan applications.

Who a consolidation loan isn’t right for

I’ve talked a lot about debt consolidation loans being an excellent way to pay down your debt and improve your financial situation. But sometimes, even a consolidation loan isn’t enough to help someone get their debt under control. Here are a few examples of people who shouldn’t consider a consolidation loan:

Those who are unwilling to change their spending habits
People who continue to go into debt without a plan to repay it
People who don’t have enough steady income to keep up with payments

How to get a debt consolidation loan in Canada

Application process: Most financial institutions have their own application process and approval criteria. A basic credit check is also standard to qualify for these loans.
Documents required: Generally, you will need to provide financial documentation including proof of income or recent pay stubs, income tax returns, and a list of current debts and assets.
Who qualifies? This will vary by institution. Generally, lenders look for steady income.
Debt types covered: These loans cover most types of unsecured debt, meaning those without collateral. These can include credit card debt, personal loans, and some lines of credit.

Other options to consider

If a debt consolidation loan isn’t a good fit for your financial situation, you may want to consider other options:

Low-interest credit card: Lower interest rates can help reduce the amount of debt you accumulate.
Balance transfer credit card: This type of card offers a lower interest rate for debt transferred from one or more higher-interest cards. Some offer a limited-time promotional period with an extra-low interest rate, even 0%.
Line of credit: A personal line of credit from a bank or other financial institution lets you borrow money up to a pre-set limit, at an interest rate lower than a typical credit card. The interest rate is usually variable, and there is no repayment schedule, aside from monthly interest payments.
Home equity line of credit (HELOC): This is a type of line of credit that is secured by your home, meaning your home is the collateral for the money you borrow. Like personal lines of credit, most HELOCs have no repayment schedule, besides monthly interest payments. Learn more about HELOCs.
Various saving methods: Anything you can do to reduce your debt and improve your earnings and savings. Cut spending or subscriptions, or take on a side hustle.

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My final thoughts

Debt is a scary thing, and things are made worse by the stigma that surrounds it. If you find yourself in debt, you need to take immediate action before that snowball gets too big to handle. A debt consolidation loan is a financial tool that can help make it easier to manage your debt.

If you are in debt, it’s not too late to change. Create and stick to a budget. Look for ways to reduce spending and earn more income.

You do not need to let debt define who you are. Use the tools available to take back control. If you’re serious about paying down your debt and rebuilding your credit, a consolidation loan might be the smartest money move you make this year.