A good credit rating simplifies life and qualifies the individual for optimal interest rates, better car loans and the best credit card deals. On a 30 year mortgage, a good credit score can save you as much as $40,000 to $50,000 over the course of the loan. A good credit score will get you better rates for your home and car insurance, too. Insurance companies calculate an “insurance score” that is largely based on your credit score. The lower the score the higher the rates you will pay for insurance.
One option for some individuals who have a lot of debt and bad credit is a debt consolidation loan. Debt consolidation loans allow the debtor to obtain a loan, pay off all credit accounts, and then make one monthly loan payment to pay off debt. A debt consolidation loan can save the debtor a considerable amount of money as long as the interest rate for the loan is lower than the original debt.
With a debt consolidation loan, the individual is able to immediately clear accounts. As accounts are paid off, the credit score will most likely increase. As the debt to available credit ratio balances out, the individual’s credit rating improves. For some people, a debt consolidation loan will quickly improve their credit scores as they pay off their balances. However, the key is not to fall into the same trap with credit cards.
What Will You Do With Zero Balances?
A debt consolidation loan will allow you to pay your credit cards and unsecured loans down to a zero balance. The
question becomes, “What will you do with zero balances?” You must remember that you are still paying off the account balances. If your credit cards were the cause of debt problems in the past, consider paying off your cards and closing your accounts. Another option might be to leave the accounts open but destroy the cards so you won’t make additional charges or purchases.
The temptation of zero balances may be a problem for some people. You must remember that a good credit rating is a cumulative score of many good credit decisions. If you are able to pay your balances down with a debt consolidation loan, refrain from running up the balances once again and getting into even deeper financial trouble.
Considerations for Debt Consolidation Loans
Debt consolidation loans are often only available to those who have some type of collateral, such as property, to secure the loan. If payments are missed on the loan, the debtor may be required to forfeit the property. Homeowners often opt to take out home equity loans to pay off high interest accounts. Compare interest rates if you are considering taking out a loan to pay off credit card debt and unsecured loans.
Alternatives to Debt Consolidation Loans
Sometimes, alternatives to debt consolidation loans may be a better solution for the debtor. Many credit cards offer balance transfer specials and attractive introductory APRs for new customers. If you are dealing with one or two high interest credit cards, you may want to look for credit card deals that provide incentives for balance transfers.
If you can qualify for one of the zero percent rate or low rate introductory APRs, apply for the credit card with the best introductory rate and transfer the balance to the card from your high interest account. Remember that introductory rates are generally only active for the first year after opening the account. Try to pay down the balance while the introductory APR is in place.
If you have bad credit, you may not qualify for one of the best introductory credit card offers. If you have collateral, a debt consolidation loan is an option for improving your poor credit score. Continue to pay your bills on time, avoid over-using your credit, and with or without a debt consolidation loan, your credit score will gradually improve.