Debt consolidation loans can be a very good option for consumers who have a lot of debt. Certain debt consolidation loans can help consumers recast their debt under a new, lower interest rate, and reduce their payments. By rolling all of their debts into one loan, with one monthly payment, their repayment process becomes easier to manage. However, if you are struggling with your debt and have damaged your credit score because of it, you are probably concerned about your ability to qualify for a debt consolidation loan.
Your concern is valid. Your credit score will play a key role in almost every loan you apply for; and, more importantly, it will play a role in the types and terms of loans for which you can qualify. If you are looking to consolidate your debt with a debt consolidation loan, there are few things to consider.
Know your numbers
It’s important that you have a complete understanding of your credit picture before you embark on any attempt to consolidate your credit. Numerous ways exist to pull a safe, secure, and free credit report. By reviewing your credit report, you may find items that need attention before you start your loan search.
There is no magical fix for your credit score. Rebuilding your credit after it has been damaged takes time and diligence. However, knowing where you stand will keep you from wasting your time applying to lenders who require higher scores. In addition, having a heads up as to what may be showing up on your credit report will help you address problems with a lender.
If your credit score is in need of repair, remedial steps exist that you can take to help your credit score improve over time. When you request a credit report, you will receive the details of your credit score. In these details, you can find out what factors are holding you back.
Your credit score consists of five key factors:
- Payment history: A record of whether or not you make your payments on time
- Credit utilization: Of the credit extended to you, the amount you are using
- Age of your credit accounts: Older is better
- Mix of credit accounts: Car loans, credit cards, mortgages, etc.
- Application history: How many times potential lenders have pulled your credit
Of the five mentioned above, payment history is the most important, as it makes up about 35% of your score. Unfortunately, this means that even one late payment can affect your credit score in a big way.
The second most important factor in the composition of your credit score is your credit utilization. This means, for example, if you have a credit card that has a limit of $5,000 and you owe $4,900 on that card, the credit bureaus are going to downgrade your score. They view this as an inability to manage money, which makes you an increased credit risk.
How long you have had your accounts, or the age of those accounts, is another aspect of your credit profile that factors into your credit score. Age of accounts is not nearly as important as your payment history or your credit utilization, but it still matters. Credit agencies feel that those who have had accounts for a long time have been successful in managing them. This makes you a better credit risk. This is why closing accounts that you are no longer using is generally not a good policy; it can actually hurt your credit score.
Most creditors and credit agencies are interested in reviewing the type of accounts you have in order to understand your ability to handle different types of credit. Therefore, if your only credit history is with credit cards, adding a car loan or something similar could improve your score. Of course, adding debt could affect your score negatively, so there are two sides to the equation to consider.
The last factor that helps make up your credit score is the number of times you applied for credit recently. If the number is high, this makes lenders and credit agencies nervous that there are additional accounts they may not know about. Chances are, if you are applying for a loan, a lender is going to want an explanation of any recent inquiries into your credit. Therefore, if considering applying for a loan in the future, you would be wise to manage the number of inquiries made into your credit. Credit inquiries can remain on your report for more than a year.
Get any errors corrected
Sometimes, things end up on your credit report that don’t belong to you, or old accounts still show as active. Getting your report cleaned up and accurate is a good start to getting back on the right track, and it can have an immediate impact on improving your credit score.
If you find mistakes on your credit report, you should begin the process of disputing them as soon as you can. While there are many companies out there that offer credit repair, it is definitely something you can do on your own. Once a credit reporting agency receives notification of an error, it, most often, has 30 days to respond to your inquiry. This means that the process of getting mistakes off your credit report can be relatively fast if it is a true documented error.
Errors on your credit report can occur for a number of reasons. There are four main reasons outlined by The National Consumer Law Center that all consumers should be aware of when reviewing their credit reports.
1. Identity theft
When someone steals your identity, the effects on your credit can be far-reaching. If someone opens accounts in your name, they can be especially difficult to remove. That’s why many consumers subscribe to credit protection through companies that monitor their credit constantly and offer repair services if necessary. If you have been the victim of identity theft, you may need to hire an attorney or an identity restoration company for help in getting it resolved.
2. Reporting errors
Three entities contribute to and affect your credit history content and accuracy: the credit bureaus, the creditors, and the consumer. Sometimes, a creditor or a reporting agency makes an error and reports something on your credit that belongs to someone else, such as a collection account or a missed payment.
3. Re-aging of old debts
Creditors will sometimes sell your debt to a third-party collection agency. Collection accounts have a defined period of time they are supposed to remain on a credit report. However, when someone buys the debt; sometimes, the clock will start over.
4. Mixed up files
It’s possible that someone who has the same or a similar name to yours can get his or her credit report intertwined with yours.
If you do find errors on your credit report, follow some guidelines to start the correction process. Credit reporting agencies will have a guide for you to follow, so read it and follow it to the letter. In addition, you will need to dispute the error with each credit reporting agency separately. Just because you are successful in resolving the problem with one agency does not mean it’s all set across the board. If, however, you see several errors on the same account, the reporting agency will allow you to address all of them in one dispute. You can work on resolving issues and errors with your credit report on your own. If you do choose to hire someone, be sure it is a reputable entity.
Start building a good credit history
Once you have your credit report cleaned up, you should start to work on building a good clean history. It is never too late to start attending to your credit in the proper way. Opening new accounts may help improve your credit score if your payment history, credit utilization, and the mix of accounts have not been great in the past. New accounts give you a bit of a fresh slate that can help you rebuild your credit faster.
If you are unable to obtain standard credit card accounts because of poor credit, then consider obtaining a secured credit card account. These accounts require that the borrower put up a deposit that is equal to the credit limit on the card. If you miss a payment, or you cease paying entirely, the bank can withdraw the funds to pay off the card. Although secured, these accounts can help you build your credit history.
If your credit is in decent shape, there are other methods you can use to help build up your credit score. Utilize these methods in any way possible, as they can help expedite the process of improving your credit.
- Stop all new purchases on your credit cards and pay down your balances.
- Don’t close any of your credit card accounts, even old ones. This can alter the credit utilization portion of your credit score and interfere with your efforts to build a long credit history.
- If you are looking to apply for a loan, do your rate shopping within 30-45 days. This applies to mortgage loans and car loans alike. Keeping it within a short window will generally lessen the impact of inquiries to your credit, as most credit models will group like inquiries together.
- Pay off any collection accounts, and then make sure they fall off your credit report.
What is risk-based pricing?
If you have been considering a debt consolidation loan, you probably have heard the term “risk-based pricing.” What this means is that lenders will look at your entire credit scenario, assess your level of risk to them, and then determine the interest rate you should pay.
Of course, those with higher credit scores won’t pay as much as those with poor credit scores. Moreover, those with poor credit scores may face limits on the amount of money they are able to borrow.
I have poor credit. What now?
Millions of consumers have less-than-perfect credit. Obtaining a debt consolidation loan with poor credit can be a challenge. Banks, credit unions, and other lending institutions offer many different types of debt consolidation loans, but qualifying for them with damaged credit may not be possible. Most lending institutions have high standards for personal loans.
If you are unable to obtain a debt consolidation loan from your bank or credit union, consider applying with a debt consolidation company. While the lending practices are more forgiving, consumers need to be careful when selecting a company to work with. Unfortunately, fraudulent companies exist that are waiting to take advantage of unaware consumers. Working with companies that are not reputable in the debt consolidation business can make your debt situation worse.
Alternatives to debt consolidation loans
If you have been unable to qualify for a debt consolidation loan, consider some other alternatives before declaring bankruptcy. Bankruptcy is a very serious legal step that will have profound effects on your financial picture for many years to come.
Debt settlement companies such National Debt Relief help consumers settle their debts with creditors. When you utilize the debt settlement method, you deposit affordable monthly payments into an escrow account, used to reach a final settlement with your creditors, generally for much less than what you owe. This is a good option for those who feel that they can no longer meet their monthly obligations but are looking to avoid filing bankruptcy.
Whatever you decide to do to address your debt, it’s important to get started immediately. Waiting only allows your situation to get worse and limits your options. Get started today on finding the right solution for your debt problem, and get on the path to debt-free living.