What Are The Credit Score Requirements For Consolidation Loans?
A debt consolidation loan lets you bundle all your existing debts together and pay them off at one interest rate. Still, to apply for one, you’ll need to have the right credit score.
Take a look at the common FICO credit score categories below. You’ll be able to see where your score ranks - and how good your chances of loan approval will be and the type of interest rate.
|Creditworthiness||FICO Credit Score Range||Average Interest Rate|
|Good||680-719||6.67% - 28.33%|
|Average or Fair||640-679||7.05% - 30.32%|
|Poor||300-639||15.06% - 36.00%[JM1] |
Please note that applying for a loan when your chances of approval are low, can actually damage your credit score further because rejected applications appear on your credit history.
Though there are options that you can pick a debt consolidation loan from a direct lender who is willing to accept bad credit scores, if your credit is poor it is always wise to work towards improving your score before you apply.
5 ways To Get a Debt Consolidation Loan With Bad Credit
There are many ways to improve your credit score over time and getting a loan even if your score is below 500.
Here are 5 of the best methods.
1. Check and Improve Your Credit Score
Before you get to work boosting your credit score, it’s essential to check the score first. To make this process easier, the federal government has created a website (annualcreditreport.com) that lets you apply for a free credit report every 12 months.
Once you receive your credit report, you’ll know exactly how good or bad your credit is - and you can take positive steps to improve it. Your credit score is basically a number that tells would-be lenders how reliable you are at paying back the money you borrow.
If your score isn’t that great, you can take steps like these to improve it:
- Make all your credit payments on time and don’t carry balances on credit cards
- If you can’t make a payment, contact your card company or loan provider and try to get an extension
- If you find erroneous entries on your credit report, dispute the entries to raise your score
- If you feel overwhelmed by your debts, you could consider credit counseling or bankruptcy as a final option – but more about this later
2. Add a Co-signer
Asking a spouse, relative or a trusted friend to cosign for you is a great way to improve your chances of obtaining a loan. It’s important to remember that as co-signers you’ll both be liable to repay the loan.
If the loan goes into arrears, your co-signer may have to repay it in full and their credit rating will be also affected. Accordingly, make sure you can make the monthly payments comfortably.
3. Reduce Your Debt-to-Income Ratio
For loan companies, the ideal customer is someone who has enough income to make their loan payments comfortably each month.
In order to qualify for a debt consolidation loan, that’s the type of customer you need to mimic.
To accomplish this consider the following:
- Pay down some of your debt – preferably the debt with the highest interest rate and especially credit card debt because credit cards report progress to credit bureaus frequently.
- Attempt to increase your income by applying for a raise or promotion, changing careers, getting a part-time job, or doing freelance work.
Read More: Debt-to-income Ratio
4. Compare Interest Rates
The higher your loan interest rate, the more you’ll pay each month - even though the amount you borrowed is the same.
Shopping around for low interest rates doesn’t take long, and it can save you hundreds or even thousands of dollars over the months and years.
5. Take a Secured Loan
Finally, one of the best ways to get your loan application approved is to secure your loan with an asset like your home or vehicle. This is called a secured loan.
|Our Tip: By following all five of these strategies, you won’t only improve your chances of being approved for a debt consolidation loan, you’ll also rapidly improve your finances and credit score too.|
Where to Apply for a Debt Consolidation Loan for Bad Credit
Now that we’ve covered the strategies you can use to increase your chances of loan approval, you’re probably eager to apply, but where do you find a debt consolidation loan?
There are three main sources of debt consolidation loans you should explore:
1. Banks and Credit Unions
These are traditional loan providers that have been in the business for decades or longer. They usually require a fairly high credit score before they issue debt consolidation loans due to their risk-averse nature.
2. Online loan providers
The world has gone digital, and so has lending. With an online loan provider, you don’t need to go into a bank and fill out forms. You can simply handle everything online from the comfort of your home.
These providers differ in the minimum credit scores they require, the amounts they are willing to loan, and the interest rates they charge.
3. Payday loan providers
A payday loan is repaid directly from your bank account on payday or a fixed date of the month you agree upon with the loan provider. This type of loan is usually for a smaller amount than traditional bank loans or online loans and is usually repaid within one year or less, but often at much higher interest rates.
Read More: What is a Payday Loan
You Have Bad Credit and Need Alternatives To Debt Consolidation Loans
If your FICO score is really low and you have credit judgments against your name or a large amount of debt that’s becoming unmanageable, you may need an alternative to debt consolidation.
Remember, there’s always a way out of debt. Here are some ways you can recover your financial health even if you can’t get a loan.
Getting Your Debt Under Control
One way to regain control over debt is via a debt management plan. You can engage with a debt management company to negotiate with unsecured creditors on your behalf.
With a debt management plan, you might be able to reduce monthly payment amounts and interest while getting creditors to agree to waive penalties and fees. This will help make monthly repayments more affordable without sinking even deeper into debt.
Use Your Credit Card Less
Ideally, your credit card should only be used in emergencies. To avoid paying high interest rates on your card, always try and repay your outstanding balance in full every month.
Otherwise, try and keep it aside while paying your monthly expenses exclusively using your income. If you find that your salary disappears each month, you may need to create a budget to help you save.
Budgeting Away Your Debt
Before you can pay down your debt, you’ll need to have extra money each month. By making a budget, which should include every single one of your expenses and all your sources of income, you can see where you can cut spending and how to boost your savings for debt repayment.
Sometimes, there may just not be a way to save enough money to repay your debts. Fortunately, America believes in second chances, and the law allows you to declare bankruptcy if you’re really overwhelmed by debt.
If you’re thinking of choosing this approach, it’s always best to consult a financial planner or accountant to make sure that it’s done in the best possible way. You can also access free advice from nonprofit organizations like StepChange.
Tap Into Your Home’s Value
If your home is worth more than the amount you owe on your mortgage, you have what’s called equity on your property. You can borrow against this amount by asking your bank to extend your mortgage or issue a home equity line of credit (HELOC).
Try To Balance How Much You Earn and Spend
Ultimately, all of the tips and strategies we can give you about budgeting come down to one thing: you need to spend less than you earn. A little discipline here will go a long way towards restoring your creditworthiness and eliminating debt.
By living comfortably on the income you already earn, you’ll be able to avoid debt and the stress that accompanies it.
Our Tip Overall
Becoming debt-free isn’t something that happens overnight. High interest rates on your loans are the enemy of financial freedom, costing you hundreds or thousands of dollars a year. Fortunately, there’s a simple way to pay off your debt at a competitive interest rate with a debt consolidation loan.
A debt consolidation loan is the best way to put all your debts in one place, lock in a good interest rate and pay them off for good. With the knowledge we’ve shared with you today, you’ll be able to apply for one and know exactly how they work and what you’re signing up for.
To get out of debt fast and for good, it is worth considering guaranteed debt consolidation loans for bad credit borrowers. The range of loans out there means there’s one for every income level, credit score, and financial situation.
Apply for yours today to rapidly watch your finances improve.