The Center for Financial Services Innovation conducted research on the financial aspect of the US borrowers in 2016 and found out that they spent over 6 billion dollars on loan installments. Moreover, 57% of consumers are financially unhealthy. And it is around 138 million adults.
The total debt of US households in the fourth quarter of 2018 increased by $32 billion and reached a record high of $13.54 trillion, according to statistics released by the Federal Reserve Bank of New York's Microeconomic Data Center.
Nowadays, it is literally impossible to get along without credit. But what to do to get out of a debt trap? There are solutions even if you want your credit score to be better.
What is a debt-consolidation loan?
It is debt settlement strategy which rolls all your debts into one payment. Usually, it is a low-interest loan which will enable the borrower to settle other multiple loans. It is mainly banks and credit unions who are the most likely to approve personal loans to consolidate debt. You may choose to pay your creditors yourself, or do it through a lender.
The main idea is, a debt consolidation loan makes sense is if it finally reduces the interest rate and monthly payment you are making on several previous loans.
Debt consolidation loan works only if its aim is to prevent the borrower from further debt. Though, the lenders want assurances they will get their funds back. And you should be ready to submit your credit score to a lender.
What credit score is needed for debt consolidation loans?
Everyone has heard the phrase ‘FICO score.’ Fair Isaac Corporation, or FICO, introduced the first credit risk score in 1981. And since then this practice has deeply rooted into all spheres of consumer financial life. Credit score is a 3-difgit figure summarizing your financial activity. It contains the history of the credit information, balances, delinquent payments.
The main criteria for calculation credit score:
35% - payment history
30% - current debt
15% - age of credit history
10% - the variety of borrowed funds
10% - third-party credit checks
All financial activity of the consumers is being recorded by the largest credit scoring agencies (Experian, TransUnion and Equifax). Based on this data they calculate the customer credit score. You must have a fair result to be approved by the lenders, and it is 640-700 points. If the figure is lower, you will be offered higher interest rates or not qualified for a loan at all.
If your FICO score is too low, the additional fees may be even 30%. In this case, it will be wiser to look for an alternative variant not to get yourself even deeper into a debt pit.
Alternatives to a debt-consolidation loan
So, you may have figured out that a debt consolidation loan is actually not affordable to you due to sky-high rates. But you should consider other options to get out of debts:
Home equity loan. If you own some property, you may use it as collateral to get funds for debt coverage. It will be a more efficient option as home equity loan is considerably cheaper than a debt consolidation loan. Be careful with this method not to lose your property at the end.
Balance transfer credit card. In this case, your creditor pays off all your outstanding debts, which can include credit cards, personal loans, medical bills and more. Then you are to pay a certain sum monthly on that card. Note, that for a low credit score this method will not be very cheap.
Debt settlement plan. What if you can no longer keep up with debt payments no matter what the rate is? It is the right time to go to debt relief company. This path is the cheapest one as you may end up paying just a part of your debts. But these companies’ services are not free and your credit score will suffer further.
Bankruptcy. You may file for bankruptcy as a last resort if none of the above options are workable for you. But it may cause serious negative consequences for your financial life.
You may find many options to get rid of your debts, even with the lowest FICO score. The most essential thing is to find a solution which will best suit your situation. And it surely will bring you to a debt-free life.
I'm a writer, website created to provide the latest information in all fields: economics, culture, society, health, technology ... If you see interesting articles please share them. Thank you!