When you want to manage your debts well in order to keep your finance on the right track, you will not only need to take out the right type of debt but also make sure that you take it out at the lowest interest rate. This is especially required when you want to take on a debt consolidation loan which ideally is the best way to get rid of your multiple debts, especially credit card debts.
Typically, a debt consolidation loan simplifies your monthly billpaying but it has to be done correctly. You will have to consider several factors such as:
- The debts you want to consolidate
- The rates each debt carries
- Your financial condition so that you do not default down the line and most importantly
- Your credit score as that will determine the loan amount as well as the rate of interest it will come with.
In general, the problem is in the interest rates on debt consolidation loans because it may vary wildly. Depending on the type of loan you wish to take out this rate of interest can be anything from a low 5% to an incredibly high 36%. On average it is found that consumers using a debt consolidation loan to pay off their multiple credit card debts typically pay about 20% in interest on those specific cards.
Therefore, the bottom line is that no matter whichever method you choose to consolidate your debts you will need to find a loan with an interest rate that will eventually be half or less than the combined rate of interest of all your existing debts. A rate of interest in single digit will help you to pay off your debt faster.
So how do you get that? Simple, improve your credit score! This will give you a lot of confidence when you visit a bank or https://www.nationaldebtreliefprograms.com/ or its likes for that matter.
Need to improve your credit score
Before you move on to the ‘steps to improve your credit score’ you must first know what the need to improve your credit score is.
- There are lots of benefits of improving your credit score but the most significant of all benefits is that it will make you eligible for any type of loans.
- You will get easy approval and instant ones at it if you apply for a loan even online.
- Whether it is a zero-percent interest balance transfer credit card or home equity, you will be better off in getting such a loan.
- A good credit score will also enable you to get a loan at a much lower interest rate and more favorable terms.
Generally, you will need to maintain a credit score well and above 700 to qualify for a loan. Therefore, make sure that you keep a check on your credit score by taking out a copy of it from time to time from one of the three major credit reporting bureaus namely Equifax, Experian, and TransUnion.
Steps to improve credit score
There are a few specific steps to follow to improve your credit score and make sure that it is 740 or higher and nothing below 660.
The first thing to know is that you will need to maintain a highly disciplined and strategic way to keep your credit score high and manageable. For that, you will need to make sure that you:
- Pay all your monthly bills on time
- Pay off the balance every month when possible and if not at least make the minimum payment
- Set up automatic alerts and payments to know when your payments are due and you do not miss out on one
- While using your credit card, make sure that the balances on the credit cards are less than 30% of the credit limit of each
- Do not sign up for any new credit cards when you are in excessive debt and
- Look out for mistakes you made in your spending and make rectifications as soon as possible
Also, make sure that you get the free copy of your credit report as that will help you to know whether or not there are any disputes in it and make formal complaints about it to the relevant authority for immediate rectification.
However, these things are easier said than done but if you can do it effectively and diligently, it will surely raise your credit score which in turn will lower the interest rate you have to pay on a consolidation loan you wish to take out.
Get more options
When you have a healthy credit score you will get more options to choose from to conquer your debts as well as manage your household finance in a better and more productive way. There are ideally four major methods to consolidate debt and each one has pros and cons associated with it. Therefore, examine each of them closely to know about it as well as the penalties or fees for things such as late payments, early payoffs, and balance transfers.
- Bank Loan – This is comparatively the simplest way to consolidate your debts. The bank will lend you enough money at a lower interest rate to pay off all your debts. You will now have to deal with only one creditor, the bank.
- 0% Interest Credit Card Balance Transfer – This is the best way to pay off credit card debts only. However, you will have to pay off the balance with the introductory period or face incredibly high interest henceforth.
- Debt Management Program – This is a service provided by a nonprofit credit counseling agency working with your creditors to reduce the interest rate and the monthly payments. You pay the agency once in a month for 3 to 5 years and they distribute it among all your creditors. However, consistency is the key here.
- Personal Loan– You can even borrow money from your friends and family with or without interest but make sure that you do not take advantage of the situation but treat it like a business transaction.
However, in all these cases your credit score and your spending habits will play an important role.