Debt consolidation loans have a lot of appeal on paper — namely their potential to pay off your credit cards in one smooth motion and the possibility of reducing how much you’re paying in interest. However, before you can reap the rewards of a successful debt consolidation loan, you have to apply… and the lenders need to deem you a worthwhile enough risk to approve.
The first baby step toward eliminating debt via a consolidation loan is simply qualifying for said loan. Here are some tips to help you maximize your chances of securing the loan you’ll use to simplify your debt load.
Bring Up Your Credit Score Before Applying
What has the most influence in whether you’ll get approved or denied for a consolidation loan? Your credit standing, of course. This means it’s in your best interest to make sure it’s in tip-top shape before sending off your applications to lenders.
You may be shocked to learn that one in five Americans had an error on at least one of their reports, according to the Federal Trade Commission. Furthermore, about one-quarter of consumers found errors on their reports capable of affecting their scores.
This means, no matter your score, it’s worthwhile to periodically check each report: Experian, Equifax and TransUnion. If you notice an error — like an inaccuracy in your payment history or a duplication — you can dispute it by phone, online or by mail.
Then do what you can to optimize your score, like paying down some debt to make your debt-to-income ratio more favorable or ask your current creditors to increase your limit to optimize your credit utilization rate. You’ll have better chances of them obliging if you’ve built up a history of on-time payments and responsible usage.
Bad Credit? Know All Your Options
Sometimes, even with errors disputed and your credit score bolstered as well as it can be at the present moment, you may still find yourself falling outside the requirements for the most competitive credit card debt consolidation loans.
The reassuring news is that there are a few possible avenues to explore here if your credit rating on its own isn’t quite doing the heavy lifting you need.
One option is getting a trusted person to “vouch” for you by agreeing to co-sign the loan. If they have higher credit than you, this can boost your chances of approval. However, this is not a decision to make hastily. Be aware they will be just as liable for the full balance as you are — and if you fall behind on payments for any reason, their financial health is on the line. Make sure you have an agreement in writing and have discussed all the details together before going ahead, as you don’t want a co-sign situation to sour.
Another possible option on the table is seeking out a secured loan. The caveat? You will have to offer up an asset to back this type of loan, like a vehicle, home or other high-value possession. The lender will be able to seize this collateral if you default, but it lowers the risk for the lender up front so they may be more willing to lower your interest rates and give you the stamp of approval.
Qualifying for a debt consolidation loan is generally a matter of making your credit score as strong as it can be — which may require a combination of disputing errors and paying off as much debt as you can. If you’re still finding your credit score insufficient to meet the threshold for classic consolidation loans, adding a co-signer or finding a secured loan — while risky — may help you get approval.