Escaping Bad Debt? Consolidation Loans that Improve Your Rating

If you have a low credit rating, chances are escaping bad debt with consolidation loans that improve your rating is a debt management option you would like to consider. The purpose of a bad debt consolidation loan is to combine your unmanageable bad debts into a single affordable monthly payment, and, over time, eliminate your bad debt and rebuild your credit score. Finding a debt consolidation lender you can trust, with terms you can afford, can be a challenge.

Common Pitfalls to Avoid

As with most loans, borrowers must qualify for a bad debt consolidation loan, which can often include higher interest rates than conventional loans. With the wrong consolidation lender, you could find yourself with a monthly payment you can't afford, and end up in even more financial trouble than you were before. You may also find yourself at risk for bankruptcy. 

In addition, watch out for consolidation lenders who want you to risk too much collateral. Some consolidation loan companies will pressure borrowers to use their homes to secure the loan. No borrower in uncertain financial circumstances, especially someone carrying a lot of bad debt, should put their home on the line if it can be avoided. 

Some consolidation lenders may engage in practices such as as keeping your money too long -- collecting interest for themselves, and making late payments to your creditors. These lenders end up increasing your burden of delinquent debt, compounding your late fees and subjecting you to collection actions.

Legitimate Consolidation Lenders

Before doing business with any lender, be certain that they have been established for a long time and have a solid reputation. Carefully research bad debt consolidation loan companies to ensure you will be working with a fair lender that is offering terms you can manage. 

National Credit Associations, such as the National Foundation for Credit Counseling, can help verify the reputation of a consolidation lender you are considering, or even refer you to a lender in your community. You can also find out if a particular consolidation lender has too many complaints against them by checking with the Better Business Bureau or with your state's attorney general's office.

Before you Begin

As a first step to obtaining the right type of bad debt consolidation loan, and to improve your chances of qualifying for the most favorable deal, acquire a copy of your credit report. Review the report for inaccuracies and work on getting those items corrected. Simply request your free credit report from Equifax, Experian or TransUnion. By law, you are entitled to one free credit report a year and can keep up with your report this way. Cleaning up your credit report will help expand your chances of getting an affordable interest rate from a legitimate debt consolidation lender.

Multiple Bad Debts are Best

Be sure that you are consolidating with a loan whose interest rate is lower than that on bad debt you are carrying. If the interest rate is higher than a particular bad debt, do not consolidate this debt into the loan. Although a bad debt consolidation loan can carry a higher interest rate than a normal debt consolidation loan, your goal is to get your total consolidated payment reduced to a more manageable amount.

Consider only consolidating your bad debts that carry high rates. Once you have consolidated your bad debt, avoid acquiring any new debt.


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