Improving Your Credit Score with Debt Consolidation

Debt consolidation is a helpful strategy that can make it easier to repay your loans and credit card debt. The idea of repaying multiple loans and bills is often overwhelming, and you may not know where to begin. This debt relief option allows you to roll your debts into one and receive a lower interest rate in order to make your payments simpler.

Debt relief programs may offer one of two consolidation options, including a balance transfer credit card or a consolidation loan. These options may your favor if you have difficulty keeping track of all your credit lines and how much you owe to each creditor. However, there are disadvantages to both forms of debt consolidation, especially if you have poor credit. Learn more about your debt consolidation options below.

Debt Relief Programs

When it comes to improving your credit score and eliminating your debt, it can help to have professionals at your side. Programs designed to help with debt can provide guidance on the relief options available, and can even negotiate with creditors on your behalf.

Debt consolidation companies generally help with unsecured debts, such as credit card debt and personal loans. They may also help with home loans and student loans through non-government lenders, such as credit card companies. The point at which borrowers turn to these programs is typically when they become delinquent and miss at least two consecutive payments.

Debt consolidation professionals are more experienced at negotiations and may also have more leverage during negotiation proceedings, especially if the company is reputable. However, when researching the best program, make sure that you read company reviews and check ratings. You want to work with a company that has:

  • Great customer reviews.
  • A high rate of successes.
  • No surprise client fees.

You are entitled to ask for quotes from a variety of debt relief companies to compare costs. In addition, watch out for companies that make false claims. A business that claims to improve your credit score overnight is most likely scam.

Debt Consolidation Loans

A debt consolidation loan is designed to combine all your debt into one loan, so that you only need to make one payment every month. There are two main types of consolidation loans including those with fixed interest rates and those with variable interest rates.

If you can pay off your debt in a relatively small amount of time, consolidating your debt with a variable interest rate may be ideal. This is because the variable interest rate often starts out lower than a fixed interest rate. Meanwhile, a fixed interest rate remains the same over time, which gives you a better idea of how much you will pay in interest over the course of the loan.

Ideally, your debt consolidation loan will have a lower interest rate than the rates on each of your individual loans. This will save you money on interest over the entire course of the loan. As a result, you may be able to lower your monthly payments and decrease the amount of time it takes to become debt free.

However, to receive low interest on this type of loan, your credit score must generally be between 580 and 669. Consequently, it may be difficult to obtain debt consolidation loans with bad credit and you may need to improve your repayment history before applying.  

Balance Transfer Credit Cards

If you want to increase your credit score while paying down your debt, you may opt for a balance transfer credit card. Transferring your credit card debt onto one card can make it easier to handle your payments and allow you to tackle your debt gradually.

“How does debt consolidation work with balance transfer credit cards?” is an important question to ask before you apply. Balance transfer cards work similarly to consolidation loans, in that your credit card debt is transferred from multiple cards onto one card. Thus, you will only have to make one monthly payment and worry about one interest rate.

The best balance transfer cards for debt consolidation have a zero-percent annual percentage rate (APR) for the first 12 months and a $0 annual fee. Keep in mind that you may only qualify for a card with these features if you have an average or good credit score.

However, there are still balance transfer cards available for applicants with poor credit. If you are looking for balance transfer credit cards for bad credit, you may consider the following cards:

  • Indigo Mastercard for Less than Perfect Credit: This type of card may charge you an annual fee between $0 and $99 depending on your credit score. However, there is no monthly fee and you do not need a minimum credit score of Average or Good to qualify.
  • Credit One Bank Platinum Visa for Rebuilding Credit: If you want to find the best way to consolidate debt with a poor credit score, you may consider this type of card. As with the Indigo Mastercard, the Credit One card for rebuilding credit may charge an annual fee between $0 and $99. You may also receive zero to one percent cash back in rewards by making purchases on the card.
  • Milestone Mastercard – Bad Credit Considered: This balance transfer card charges an annual fee between $35 and $99. The regular APR rate is 24.9 percent, and there is no monthly fee.

With these options in mind, a balance transfer card may not be the best way to consolidate credit card debt if you have poor credit. You may only qualify for a very small unsecured credit line, and the fees associated with these cards can get high. As a result, you may be better off paying down some of your debt first, in order to qualify for a better balance transfer credit card offer in the future.