Posted by John Doe
What is a debt consolidation loan?
Debt consolidation is a form of debt management that combines all of your debt with multiple creditors into one simple loan. A debt consolidation agency or bank will cover the amount of your debt spread across multiple sources—credit cards, student loans, income taxes, medical bills, and other unsecured debt—and will allow you to repay them with a specific interest rate and term. Basically, you will still owe the same amount of money, but instead of owing it to multiple sources, you will only owe to one. You can negotiate for a more manageable monthly payment and interest rate compared to credit cards, allowing you to pay your debt without struggling to afford basic living expenses.
What is a credit score?
A credit score is a numeric measure of your financial history. It allows creditors to analyze the level of risk that comes with loaning you money. Every time you rent an apartment, buy a car, or get a loan, your credit history is viewed by the creditor. These scores are also updated by creditors, and your score will drop if you miss payments. By maintaining good credit practices, you can have a strong credit score, which will allow you to get loans from creditors with lower interest rates. However, if your credit score is too low, your interest rates could be very high, and you might be denied the loan entirely.
How does your credit score affect your loan?
The more debt you have, the more you have to pay in monthly interest. As these payments become higher and higher, it is very difficult to pay off the principal loan. If you miss payments, your credit score will drop, so it is important to find assistance with debt consolidation before you miss a payment. Unfortunately, for those whose credit score is too low to secure a debt consolidation loan, bankruptcy is the likely option. However, there is also a great deal of risk in agreeing to a loan for debt consolidation with a high interest rate. You must look at the term and interest rate of the loan to ensure you are not paying more to consolidate your debt.
Improving your Credit Score
There are a variety of good practices that can help you improve and maintain your credit score. Here are some tips for improving your credit score and maintaining good financial practices in the future:
Keep old accounts on your credit report
The longer your history is with a creditor, the more they know and trust you. Rather than pay off your credit card and close your account, keeping the account can allow you to boost your credit score as time goes by. Demonstrating that you can pay off debt will also boost your credit score.
Consider increasing your credit
While it may seem counterintuitive, in some cases, increasing your credit limit can actually benefit your credit score. If you carry low balances on your cards or pay them off consistently, increasing the limit will actually reduce your credit utilization percentage, which can increase your score.
Automate your bills
Every time you miss a payment on a bill, your credit score can suffer. For many people, simply forgetting to pay their bills on time is the reason their credit score is less than optimal. If you struggle to pay your bills by their due date, consider automating your payments through your bank. This will ensure your payments are always made on time. However, it is important to ensure your bank balance is always high enough to cover the
amountof your automated payments, otherwiseyour bank may draw into overdraft.
Use your credit card
It is impossible to have a good credit score if you do not have any credit at all, so it is important to use your credit card. Even one purchase each month will help you build a great credit score, as long as you pay off your purchases in full each month.
Opt for a secured credit card to build credit
For those whose credit score is too low to get a credit card, ask your bank about a secured credit card. This requires you to put a set amount—say $500—in a savings account with your bank, and they will issue you a credit card in that amount. You can use it like any other credit card with a $500 limit, but the bank is safe since you gave this amount as collateral. This will allow you to build a credit history until you are approved for a credit card.
Keep an eye on your credit score
There are a wide variety of apps and programs that can help you find your credit score—or, at least, a good estimate—in just a few minutes. By monitoring your credit score through one or more of these free apps, you can see how it changes based on your bill payments and loan applications. This will also help you catch any errors in your credit report.
Prepare before applying for a loan
Many of these tips can offer a bump to your credit score, especially if used responsibly. For those who are thinking about applying for a loan, credit card, or mortgage in the near future, it is important to plan ahead. Depending on the amount of money you are borrowing, you may need to plan three, six, or 12 months in the future to ensure you have an optimal credit report when you apply for your loan.