In 2014, more than 34 percent of all Americans had a subpar credit score that measured 620 points or less. In other words, approximately every third person was in a financial rut that put a strain on their purchasing ability. Fast forward to a few years later, the statistics have yet to get noticeably better. Although the economy is stellar, the issues arising due to a damaged consumer credit relentlessly linger.
Fortunately, the financial markets tend to correct themselves when given enough time. The same concept applies to buyers on an individual basis. In translation, people who may have a history of bad credit are historically prone to improving it in the long-run. After all, even the passage of time is one of the factors that help increase a credit score. Thus, patiently waiting can be a solution to your credit problems. That is, of course, if you have no intention of purchasing anything pricier than groceries for the next decade.
Consequences of Bad Credit
Given that a credit score is a mere number quantifying your spending habits, it may appear that it carries no considerable weight. After all, would it not be more logical for lenders to pay attention to your pay stubs, assets, and other indicators of financial freedom? Absolutely not. Your credit is connected to your purchasing power in the same way that your college transcript is connected to your job opportunities. In other words, if you fall within the average or above-average rank, you are likely set for success. If, however, your grades yield a 1.5 GPA, employers will probably rather hire a plant than you.
This is how the world of lending works as well. Those who run credit checks utilize them as a first-hand insight into your previous patterns of debt repayment. It gives them a numerical value that assesses your skills with money management. If they deem you to be incapable of repaying the amount that you inquire in form of a loan, they will have absolutely no incentive to transact. Think about it as a scenario where a serial arsonist asks for a box of matches. Given the likelihood of fire, you will probably not be inclined to grant their request.
Overcoming Bed Credit
As mentioned, waiting for someone’s credit score to grow as a byproduct of the seven-year, sunset rule is not the most appealing alternative. For those unfamiliar, this is an approach where you simply wait for every claim and negative line item on your credit score to be removed. In the financial spheres, the magical number is seven (years) as the vast majority of debt fails to roll over past that threshold. Those who may want to improve their credit sooner, however, will need to be proactive. So, how exactly does someone go about improving a bad credit score?
Consolidation loans, which are also known as the bad credit loans, are a financial instrument used to reduce your credit utilization, lower the interest payments, and offer more accessibility. In case that sounds like a mouthful, consider the following analysis of how most people find themselves in a bad financial position.
The main contributors to bad credit go back to your credit card utilization percentage, debtor claims, and declined applications. Naturally, of course, there is a number of other factors that play a role. Those, however, will not be as material to the process of improving the credit score timely. In our case, the only two factors that truly matter are the utilization and claims of debt. So, what does this have to do with consolidation loans?
Credit Card Utilization
When opening a line of credit, the general rule of thumb is to keep all spending on such account below 35 percent of the overall limit. So, if someone’s credit card has a $10,000 spending limit, they should not use more than $3,500 a month. The reasoning behind this is built on the slow-and-steady-wins-the-race doctrine. Meaning, creditors want to see a repetitive trend of on-time payments, minimum credit utilization, and very few spikes in spending.
The problem appears when someone is forced to go beyond the aforementioned 35-percent threshold. Doing so effectively brings their credit score down. Additionally, most people who are in this situation have more than just one credit card. This is where a consolidated loan comes in. Since every month that your credit utilization is high has an adverse impact on your credit, you should lower the outstanding balance on such accounts immediately. With a consolidated loan, you can take out a lump-sum payment and pay off every single credit card. In turn, the utilization will go down to zero percent and the credit score will rise.
Another benefit of bad credit loans is the lower interest rate. When someone has multiple credit accounts with outstanding debt, their interest rate is what prolongs the repayment period. After all, credit cards are known to have some of the fiercest APRs fathomable. By consolidating debt, you will be able to sidestep the never-ending-interest landmine. This will yield in a higher principal monthly payment and fewer months spent repaying what you owe.
Ultimately, consolidation loans will make it much easier to make monthly payments in the first place. The reasons why include the following:
- You will make a single payment to the same entity every month;
- You will not have to pay a balance of each credit card at a different date.
Additionally, consolidation debt is essentially a loan subjected to contractual terms. Thus, the likelihood of your conditions changing at a later time are practically non-existent. In the world of creditors, however, your debt can be sold, altered by the market’s conditions, and much more.
Understanding the Outcomes
Prior to finalizing an application for debt consolidation, you should understand the potential outcomes. Although debt consolidation may result in a lower credit in the short-run, it is bound to cause a spike in your score in the future. Thus, you should see this as a method that will facilitate a better credit history. Regardless, it will not happen overnight. Nevertheless, your ability to pay off multiple creditors and eliminate blatant claims while potentially lowering interest payments is definitely worth the effort! If you’re not sure what kind of loan you need contact the professionals at Associates Home Loan with any questions you may have.