Let’s begin with a cold, hard fact: any time you have a credit card balance that is at or near the limit, your credit rating will sink. It’s an indication that you’re relying too heavily on plastic, and you seem to be in financial trouble. Credit scores are designed to help lenders understand their risk in taking you on as a customer, so how much you owe compared to the amount you can borrow (called credit utilization) is one of the most important credit scoring factors. In short, if you are holding high balances, your credit scores will be low. The ideal way to bring them up is to use cash to delete the debt. Without that, look to other options, including debt consolidation.

Imagine you have three maxed out credit cards on which you owe a total of $10,000. If you were to transfer the majority or all of that debt to a fresh new loan you would still owe the same sum, but your credit cards will be at paid off. Think about that. You would have at least $10,000 available to you on the combined accounts. Since credit scoring companies, such as FICO and VantageScore, analyze the difference between debt and credit limits, you’re suddenly in a far better position. Boom: a higher credit score!

As a consumer you have a number of methods available to you when it comes to consolidation. Here are the biggies, in no particular order.

  1. Bank or credit union loan. Almost all of these financial institutions offer some sort of personal loan that you can use for consolidation purposes. You’ll need a job that provides enough income to meet the monthly payments, and if your credit scores are really low — under 600 — they may not be available to you. Ask about the qualification requirements before you apply so you can avoid an unnecessary ding on your credit report, as inquiries can lower your score a little. Also know the origination fees, which is usually a couple of percentage points of the amount they take on, and the interest rate. If the rate is higher than what you have on the cards, you’ll end up paying more in fees.
  2. Peer-to-peer lending. Outside the realm of banks and credit unions are companies that conduct what’s called peer-to-peer lending. These unique firms are set up for individuals to both borrow and lend money. Because they cut out the middleman of very large financial institutions, their operation costs are lower. That means their consolidation fees and interest rates tend to be a bit better than those of the big lenders (though they also demand that credit scores must be at least somewhat OK). Among the most popular are Prosper and Lending Club.
  3. Lenders that focus on people with lower scores. In the event your credit scores are under the 600 mark, don’t worry. You still have options. Subprime companies (including Avant, which is backed by Paypal) have cropped up to fill a gap. True, their interest rates and fees are not great, but if your intention is to expand your credit utilization ratio so your scores enjoy a numerical hike, they can work for you — as long as you’re committed to paying the loan off quickly.
  4. Credit card balance transfer. Want zero percent APR for a year or more on those balances that are eating your payments up with ever accumulating interest? Explore using another credit card as a tool to consolidate your current cards. As with all consolidation loans you’ll have to qualify for a balance transfer, and there are origination fees (typically 2 to 3 percent of the debt) to consider. Get one, though, and you’ll save a tremendous amount of money if you repay the debt within the promotional time-frame.
  5. Home equity loan. If you own your own home and have paid enough principle to have equity in it, odds are great you can take out a loan against it to pay off those pesky credit card bills. The interest rate is almost guaranteed to be lower than with other loans, since its secured by the property. But very careful. You’ll want to be absolutely certain that you can afford the payments, since of you fall behind and default, your home is on the line.
  6. Bank of Mom and Dad. This is both the best and the worst way to deal with your consumer debt and increase your credit rating. If your parent (or other loved one) can lend you the money to eliminate your big balances, it will appear to all who gaze at your credit report that you’re in the clear. Your scores will spike with the sudden absence of debt! On paper, that is. You’ll still owe, but this time to people you care most about. More relationships have suffered terrible fates because of unpaid interpersonal debts than just about anything else — for proof, just watch a few episodes of Judge Judy. If you go this route, make it formal with a contract outlining the terms of repayment, and honor the agreement.
  7. Debt management plans. These are offered by credit counseling agencies. While not loans, so many people confuse them as such that they’re worthy of mentioning. Plus they really can help in the right situation. After a free budget and debt appointment, your counselor may suggest that you close the cards and pay all of your creditors through the agency, which will then distribute the funds. Because they have arrangements with most credit card issuers, the APRs will drop. Your credit rating is not a factor in approval. All you need is to be able to pay your essential bills plus the monthly payment, which will get you out of black in three to five years. You’ll maintain (or return to) a steady payment schedule while promising to not get into any more financial obligations while you’re on the plan. As your debt declines and the perfect payments are posted on your credit reports, your scores will rise.

Finally, if you do choose a consolidation loan, take my advice: do not touch the empty cards while you’re paying the new creditor back. If you do, you’ll end up owing more than you can handle and won’t have the majority of the above options open to you. Then you may end up in bankruptcy court — and with a credit score that is at the bottom for years.

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