If you feel like you’re drowning in debt, getting a debt consolidation loan can feel like someone has thrown you a life preserver. You can hopefully lower your monthly payments to ease the burden on your budget, and pay less interest through the life of the loan. The only thing holding you back could be your credit score. If your score gets too low, then you may not qualify and you’ll go back to the drawing board. Luckily there are some steps you can take so that you can build your score and qualify for the loan. Here’s how.
Pay Your Bills
Ignoring your bills and letting them pile up is bad enough at the best of times, but it’s devastating when you are already in debt and behind on payments. Your credit score depends on your history of paying your bills on time. Making late payments will tell lenders that you aren’t able to keep up with the payments you have now, so why should they take a risk and lend you more money?
The past is the past, and you can change it. If you’ve struggled to keep up with payments, then it is time to start making sure you can make them on time. Over time, your credit score will improve. Part of the battle involves making a budget that’s realistic. If you spend more than you have, then your debts will keep piling up. If you have to, set reminders on your phone, or set up automatic payments. If your payments are gone from the account before you have a chance to spend the money, then you won’t be tempted.
Keep Tabs On Your Credit Report
Maybe your credit score is lower than you think it should be. Sure, you’ve had a few missteps here and there, but everything is fine now, right? If you’ve been declined and you think there was an error, then take a look at your credit report. You can get one for free every year by federal law. There are several credit reporting bureaus, but the main ones are Equifax, Experian, and TransUnion.
Compare your score with each of the bureaus. If there is a difference with one of them, then there may have been a mistake. Some credit scores may include debts that you’ve paid off, or simply have wrong figures. It’s important that you closely examine every aspect of your report, and talk to your lender if there is an issue.
Use Your Credit Cards
There is a good chance that most of your debt consolidation loan will go towards credit card debt. Cards have high interest rates, and people can pay for purchases without knowing how much they are spending. However, you never want to stop using your credit cards completely. If you have an empty card, then use it to make your monthly purchases, such as groceries. Have a strict budget so you don’t spend too much, and then pay your balance off in full. That will give you a bill that is helping your credit score, when paying in cash or with your debit will not. Just make sure that you do not use it for a large purchase that you can’t pay off right away.
Carry Lower Balances
Lenders will always look at the ratio between your debt and your credit. It’s a percentage of how much credit you use against how much credit is available to you. If you make large purchases and make the minimum payment every month, then your ratio will be too high for lenders’ comfort. When they are not comfortable, they won’t lend you money. You should do whatever you can to get it down to 30%.
It might not surprise you, but the best thing you can do to lower that percentage is stop using your cards, or at least stop allowing them to go up. Then your minimum payment will go farther, and your balance will start to lower. If you have maxed out cards, don’t close them, but don’t pay them down to use them. Pay them down so you will have more credit available and a lower percentage.
Pay Your Debts
If you have a budget that can tolerate it, make payments that will lower your debt load, not just meet the requirements for payment. Your minimum payment probably barely covers the interest, so you are not making much headway by making the minimums. You can either pay down the card that has the highest interest rate, or you can pay down the card with the lowest balance. The lowest balance might make sense since it will open up more money to pay down debt once you have it paid off.
If you are declined for a debt consolidation loan because of your credit, don’t be dismayed. You can use these strategies to slowly improve your credit score and get it back to a point where lenders will approve you. However, it won’t happen quickly, so take your time and be disciplined.