Debt consolidation is essentially a financial institution loan created to include a lump sum of personal debt. In other words, multiple past due bills can combine into one bill to simplify monthly payments. In exchange, the financial institution charges interest on the loan, which increases the total amount of money owed. But debt consolidation is still a good option for those who are struggling and qualify for the assistance. What qualifies a person for debt consolidation?
Fair Credit Score
Debt consolidation can help improve your credit score in time, but you won't even qualify for the assistance if your score is too low. The financial institution needs to see that you have a history of repaying loans or credit cards. This lets the institution know that it will receive the loan money back after you're over this short-term economic hardship.
Talk to a credit counselor before applying for debt consolidation to access whether your current credit score is high enough for consolidation. If it's a bit lower than what's needed, the counselor can provide tips for raising the score high enough to qualify.
Having a healthy credit score doesn't automatically equal the ability to repay. If the financial institution looks at your income and savings and doesn't see enough money to cover the monthly payment, you won't receive the debt consolidation loan. But don't stop with the first financial institution you find. It's important to compare the interest rates between debt consolidators to secure the best repayment terms possible. Check the small print to make sure there aren't additional fees tacked on that could make the monthly bill more than you can afford.
Don't apply to more than three debt consolidation programs in a short period of time. The institutions will run your credit report as a hard inquiry. A large number of hard inquiries makes the credit scoring agencies think you're trying to score too much credit too quickly. This will lower your overall credit score and, in turn, make it less likely you will qualify for debt consolidation.
Qualifying for debt consolidation is only part of the process. You need to do advanced research to find the best lenders, collect documentation of all your personal debt and work with both the lender and a credit counselor to determine what debts should go into the lump payment. Bear in mind that the lender will likely close or cancel any credit cards held in consolidation to prevent you from using them and creating more debt.