If you want to use debt consolidation, you have to make sure you improve your credit score first. According to reports, 2 out of 10 Americans have a VantageScore of 800 to 850. This is a very high score and if you belong in this range, then you are in good shape. But if you have a score that is 699 and below, that can compromise your debt consolidation efforts. The lower the score, the more unappealing consolidating can be.
Most of the time, the consolidation involves a new credit account that you will use to pay off your multiple debts. It can be in the form of a loan or a balance transfer card. The only option that will not require a good credit score is debt management – which involves the help of a professional. But if that is not the debt relief strategy that you will use, then you might as well make sure that you have a good credit rating. While it will not guarantee debt freedom, it will definitely help make things easier for you.
Why is a credit score important in debt consolidation
So how can a good credit score help with debt consolidation?
Proves you are responsible for paying back the loan
First of all, having a high credit rating means you are responsible with debt. If you know what makes your score go up, this will all make sense. If you pay your debts on time and you do not borrow too much, that can increase your score. Both of these indicate that you are both responsible for paying back what you owe. Not only that, but it also shows that you are smart when it comes to borrowing money.
Influences the interest rate you will get
If your score proves that you can be trusted with debt, it can help you get a lower interest rate on the new credit account that you will open. You see, the interest rate that creditors and lenders use is there to help protect them. In case you decide not to pay the whole loan, they have to try to earn as much as they can from the loan. This is done in the form of the interest rate. So if you have a bad credit score, that can lead to a higher interest rate. And if your interest rate is higher than the average rate of your multiple debts, then consolidating the latter into the new one will not be beneficial for you.
Tips to improve your credit score
Now that you know how important a good credit score is, you can start working on improving it. If you are planning on doing your own debt consolidation, you need to look at your credit report and see if your score needs improvement. If it does, then you can follow these simple tips to make that happen.
Automate your payments
A big part of your credit score is influenced by your payment behavior. Every time to are late on payments, that will cause your score to go down. If you do not meet the minimum payment, that will also pull your score down. If you want to give your credit score a boost, you need to to make sure your dues are paid in time.
The easiest way to do that is to automate your payments. At least, do this for the debts that have a fixed monthly payment. Set it up to be paid automatically so you will never be late. If the amount is not fixed, then you can just set up reminders a few days before the due date. That will ensure that you will never miss out on a payment.
Stop increasing your balance
Another thing that you can do to improve your credit score is to refrain from increasing your balance unnecessarily. Do not borrow money unless you really need. This does not have to be forever. If you want to keep your credit score up, you need to continue using debt. However, you need to be cautious about your credit utilization. The ideal balance to limit ratio is 30%. So if your limit is $10,000, your debt amount should never go higher than $3,000. If you use debt consolidation loans, do not add to it until after you have brought your balance down.
Postpone opening new credit accounts
In case you have plans of borrowing a home loan or a car loan – postpone it for now. Prioritize the debt consolidation so you can work on your existing debts. The same is true for new credit cards. According to reports, 110 million new credit card accounts were opened in 2016. You need to stop borrowing for now because every new credit account will hit your credit report and can affect your score negatively. Yes, that is also true for the debt consolidation loan that you will use. However, the good thing about the latter is that it will eventually lead to the improvement of your score as you pay off your debts religiously.
Do not close old credit accounts
Finally, you should also keep yourself from closing the old credit accounts that you have. That can also affect your credit score negatively. Even if you have already transferred the balance of some old credit cards, you should keep it open. Use it every now and then but make sure you pay the amount you purchased in full.
If you follow all of these, you will soon find your credit score rising. When it is high enough, you can be more confident in starting your debt consolidation efforts.