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When trying to deal with debt, consolidating your credit cards and high-interest loans can help you save a lot of time and money. Debt consolidation is a great way to get out of debt and more often than not, it can help save you from financial ruin. While getting out of debt can be life-changing, you need to consider how a debt consolidation loan will affect your credit.
Will it look bad on your credit report? Will it affect your ability to get a loan in the future? And how do you go about consolidating your debt so that it won’t negatively affect your credit rating?
The debt consolidation loan is probably the most popular form of debt consolidation. Simply put, you get a new loan that has better terms and a lower interest rate, to pay off your other debts. If you’re currently thinking about consolidating your debts this option is probably high on your list of viable choices.
A debt consolidation loan can be an extremely useful tool, just make sure you’re getting one that is actually going to help your debt situation, and not hurt it. Your best bet is to go with an alternative lender, especially if your credit is already less than great. Banks typically only want to lend to people with a high credit score. An Alternative lender will work with you to help you get back on track; just make sure you choose a reputable lender.
It’s important to remember that a debt consolidation loan may cause a short-term dip in your credit scores. But over time as your make on-time payments and pay off your debt consolidation loan, you will build a healthy payment history. This is one of the most important factors used to calculate a credit score.
If you’re having trouble getting a debt consolidation loan because of your low credit score or income, you should consider entering a debt management program. You’ll work with a credit counsellor who will negotiate with your creditors to reduce your interest rates, fees or payment amounts by extending the period of time to repay the debt.
A debt management program allows you to consolidate your debts into one manageable monthly payment plan. Do note, a DMP does not eliminate or reduce your overall debt owed, it simply makes it more manageable. You’re still paying back all of your debts through a DMP.
A debt management program is often a better solution than a debt consolidation loan because your credit score isn’t taken into consideration. So even if you have a low credit score and can’t qualify for a debt consolidation loan, you can still consolidate your debts through a DMP.
If you want to consolidate your debts on your own then you might want to consider a balance transfer. This is where you transfer the balance from your high-interest credit card to a card that has a lower interest rate. While this can work it is extremely important that you find a credit card that has a lower interest rate and affordable balance transfer fees. A balance transfer is almost never free so if the fees associated with it are high, it might not be worth it. Also, make sure that the low-interest rate you thought you were getting doesn’t end after a short introductory period.
Your ability to consolidate your debts with bad credit depends on the method you use to consolidate them.
While every debt consolidation option has its own unique effect on your credit rating there are a few positive effects you can look forward to:
While every debt consolidation option has its own unique effect on your credit rating there are a few negative effects you should prepare yourself for:
If you handle debt consolidation appropriately and responsibly, the long-term effect on your credit score and report should be more positive than negative. Trying to cut corners or ignoring the issues at hand will end up doing more harm than good. We want you to remember that the main goal of debt consolidation is to pay back your debts and take back control of your personal finances. In the end, your credit report should be on its way to looking better than it did before you decided to consolidate your debts.
If you’re looking for a debt consolidation loan and have bad credit, be wary of lenders who offer “guaranteed debt consolidation loans” or credit repair services who claim to erase negative remarks from your credit report. Those who make such claims are generally scammers looking to steal information and money out of you.
You should be wary of any lender who offers guarantee approval to those with bad credit. Legitimate lenders will never approve a borrower without conducting some sort of underwriting process.
Signs to look out for:
Credit repair services that claim to erase bad credit or improve credit fast are usually scammers looking to take advantage of unsuspecting borrowers looking for help.
Signs to look out for:
If you’re looking for a debt management solution but aren’t sure where to start, Loans Canada can help match you with the right option and find you the best service provider.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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