Debt consolidation represents one of the many debt relief options availed to you if you have unmanageable debt. Debt consolidation basically puts together all your current debt and combines them into one loan with low interest rates and even lower monthly repayment rates.
Debt consolidation is applicable for secured and unsecured loans. These include credit card debt, personal loans, payday loans, outstanding debts, and rates or accrued taxes. While the rates are normally favorable for the debt consolidation loans, there is a big shift when handling debts and loans from individuals with poor credit or low credit scores.
Since many other loan options or debt relief alternatives aren’t available to persons with poor credit, debt consolidation will charge higher interest rates since you are considered a financial risk. Even though the debt consolidation plans often offer lower interest rates, this will not be the case when you have a poor credit record.
What is poor or bad credit?
Though there isn’t a clear definition or line for where the poor credit starts, poor credit is generally considered a numerical representation of how your finances and your borrowing history is ranked. When you get a loan from a financial institution or even a credit card debt, all that information is recorded somewhere. When you pay off your debts fast or within the agreed time in full, then you are bound to have a good credit. Taking several salary advances, and too many loans may however affect your credit score.
There are two ways of determining your credit score with the most common one being FICO. A good credit is above 620. The other is the VantageScore that gives the range of good credit to lie anywhere between 300 and 850. 300 is the worstscore and 850 the best credit score. Any of these two can be applicable and you will get a debt consolidation loan with favorable terms when your credit score is good.
Because of the bad credit or the low credit score, it is hard to get a loan since you are considered a financial risk. However, you will get a debt consolidation loan that is secured against an asset if you have assets. The following loans provide easy debt consolidation for bad credits:
- Home equity loan or mortgage refinancing
Even though your income and your personal risk tolerance will be evaluated, a debt consolidation loan can be easily given against your mortgage or home. The home equity loans have been shown to be among the only secured loans given to persons with bad credit at low interest rates.
Fortunately, it is possible to deduct the charged interest on your tax returns and the loans get extended repayment periods if you need to pay lowered monthly repayments.
- 401K loans or loans on your life insurance
Your life insurance or the 401K is considered an asset. You can use either of the two to secure your debt consolidation loan. Since the 401k assets do not require credit checks, they are suitable for persons with poor credit.
Options for persons without homes or mortgages
- Credit unions
Loans available through credit unions are suitable alternatives when you do not qualify for debt consolidation loans from the banks.
- P2P consolidation loans
The P2P institutions allow you to borrow money directly from individuals rather than traditional banks. There are many peer to peer lending companies online meaning that you can access the loans easily. They also have lower interest rates.
How to rehabilitate your credit after debt consolidation
Even after you geta secured debt consolidation loan with bad credit, you should make efforts to change your financial situation. Besides easy debt consolidation for bad credits, you have to improve your financial status after getting the loan. Some of the steps that you can take to improve your credit score include:
- Paying bills on time
You will still have bills to repay after the debt consolidation loan and repayment of previous arrears. Don’t accumulate more credit. Since your payment history determines your credit score, ensure that you repay everything in time and don’t fall behind on any credit card payment.
- Stop opening many credit card accounts
For an improved credit score, avoid opening too many credit accounts at the same time. This will reduce the age of your account lowering your credit score.
- Check your credit report
The given values maybe inaccurate. Federal agencies with information on your credit score give credit score information once every 12 months. For your personal knowledge, it is important that you check your credit score in advance. This also ensures that you know when you need to improve your repayment history.
- Keep your credit balances low
It is wise to maintain your credit balance at less than 10% of your overall credit. Your income to credit ratio is used to determine your credit risk. A high credit to income ratio means that you will be denied access to loans and other financial instruments.
- Don’t cancel unused cards
Unless your unused credit card carries an annual fee, do not cancel it. The credit scores depend on the ratio of used credit against total credit available. When you cancel some cards, you reduce your credit line and this will work against you because your credit ration will increase.
- Pay off debts in collections
If you repay your debts in collections, this will not reflect on the credit scoring system. The FICO system currently ignores collections if they record zero balances
- Save more
Open a bank account and save as much as you can. During evaluation, when you have a substantial amount in savings, your credit score will not be perceived to be so bad. Saving also means that you should change your lifestyle or your spending habits so that you have a little more left from your income and this goes to the savings account.
In conclusion, though debt consolidation isn’t the only debt relief alternative in the market, it is appropriate when you do not wish to file for bankruptcy and when you do not qualify for debt settlement or debt management. Lifestyle change and taking control of your personal finances as well as business finances ensure that your business and your finances are safe in future.