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Oftentimes people who are interested in consolidating their debt want to do so in order to save or boost their credit score. While consolidation is a great option even if you aren’t having trouble keeping up with your payments, the fact remains that most people don’t look into consolidation until they’re in trouble.

Given this reality, it’s important to understand what your debt consolidation options are if your credit is less than perfect. It’s especially important to understand what your debt options are if you have bad credit, because debt consolidation can be a strategic way to start to boost your credit score. This guide will help you understand how credit scores relate to debt consolidation, how lenders evaluate you, the relationship between credit scores and interest rates, and the different alternatives you have if you can’t get a consolidation loan.

Credit Scores and Debt Consolidation

Credit scores are extremely important numbers. They are used by all kinds of entities to make decisions about you. The decisions made involving credit scores include whether or not to offer you financing on things like home and auto loans, what kind of interest rates you get if you qualify for financing, and employment decisions by potential employers.

As you can see, with all of this focus on your credit score, it’s important to have the best possible score to make your life easier. A better credit score means you’re more likely to qualify for loans, and the interest rates you’re offered on loans and credit will be better.

Having an average to good credit score (650 and above) means it’s extremely likely that you’ll qualify for a consolidation loan. However, the lower your score gets below 650, the harder it can be to obtain these products.

If you’re on the boarder of 650, and are considering a consolidation loan, then it’s in your best interest to execute action soon. Getting a consolidation loan can help boost your credit score in a number of ways. Depending on the type of debt you have, a consolidation loan can enhance your mix of installment and rotating credit. Additionally, if you’re paying off revolving debt, then a consolidation loan reduces the amount of available credit that you are using. This can add a huge boost to your credit score.

A credit score is essentially a measure of how much of a risk you are to lenders. The higher the score, the less of a risk you are. That’s why people with higher credit scores get more favorable terms on financing and credit. There are several factors that go into your credit score, and it’s one of the main ways that lenders evaluate you.

Understanding How Lenders Evaluate You

When you apply for a loan or credit, there are two major things that lenders look at. Your credit score is one of those things, and the other one is your debt-to-income ratio.

Your credit is a number between 300 and 850. The higher your score, the better your creditworthiness, and the more likely you are to qualify for financing and loans. A credit score is produced by looking at a series of factors, including:

  • Payment history for loans and credit
  • Credit utilization
  • Type, number, and age of accounts
  • Public records like bankruptcy, judgements, or tax liens
  • New credit accounts
  • Inquires on your credit report

As you can see, these factors basically attempt to summarize your entire credit history and express it in the form of a number. Understanding how these factors affect your credit score can go a long way in helping you get the score that you need to get the financing you want.

In addition to your credit score, lenders will also consider your debt-to-income ratio. This is an expression of how much money your monthly bills are each month, compared to how much money you bring in every month. Lenders will be extremely cautious about lending to someone who doesn’t have a good debt-to-income ratio. The closer this ratio gets to even, the less money you have each month to pay off new bills, and the higher the risk that you’ll default.

Credit Scores and Interest Rates

Credit scores affect interest rates in the sense that a credit score tells a lender how likely you are to default on your obligations. The lower the risk of default, the lower the interest rate a creditor will offer. That’s because the creditor can be relatively sure that you’ll pay back the loan or credit, so they don’t need to charge as much to make the investment worth the risk on their end.

Individuals with lower credit scores can still qualify for credit and loans. However, these consumers will get higher interest rates to reflect the fact that they are considered at a higher risk of default. To cover this risk, the institution needs to make more money from the loan to make the risk worth it.

We strongly encourage consumers with low credit scores to avoid most loans and credit offers, as the interest rate you’ll pay on these products will make it more likely that you’ll encounter a cycle of debt that you can’t climb out of.

Consolidation Loan Alternatives

Thankfully, consolidation loans aren’t the only way you can manage your debt and lower your payments. You can also sign up for credit or debt counseling services. These services will frequently negotiate with your creditors on your behalf to secure lower interest rates. The credit counseling service makes the argument that because you are working with them, you are at a lower risk of default because you’ll have help managing your finances.

Credit counseling can also help raise your credit score so you can qualify for consolidation loans. Credit counselors are experts at designing a realistic budget that allows you to pay your bills and keep your finances on track. The predictability and planning you get from a stable, feasible budget helps you make your payments on time and lower your balances, showing that you a responsible borrower and someone that a company should lend money to.