Can You Qualify for Credit Consolidation?
Making credit consolidation work depends on your credit score and ability to afford the payments.
Credit consolidation allows you to roll multiple high interest rate credit card debts into a single monthly payment. The goal is to simplify your payment schedule and reduce or eliminate interest charges. This makes it easier to pay off your debt faster.
But credit consolidation is no magic bullet. If you use the right consolidation option in the wrong circumstances, it won’t help. In some cases, you can actually make your situation worse. So, it’s not just a matter of qualifying – you have to qualify at the right rates and terms.
There are three basic ways to consolidate debt. The qualification standards vary based on which one you choose. You need to find the solution that works for your unique financial situation in order to be successful.
Qualifying for a balance transfer
This option for credit card debt consolidation requires two things:
- An excellent credit score
- The ability to make large payments on the consolidated debt
You need excellent credit in order to qualify for the longest 0% APR introductory period possible. If you have fair or good credit, you may get a card that offers 0% APR for six months. But if you have $20,000 of debt to eliminate, that’s not exactly easy to accomplish in just half a year.
This is where the ability to make large payments comes in. You need to be able to make large enough monthly payments to eliminate your debt within the 0% APR promotion period. Let’s say you have excellent credit and qualify for an 18-month promotion instead of 6-month. To make this work, you’d need to make payments of at least $1112 to eliminate your debt within 18 months.
Before you do a balance transfer, run the numbers carefully to make sure you can afford to pay off your debt in-full interest-free. Otherwise, even if you qualify for the credit card this may not work!
Qualifying for a debt consolidation loan
The primary factor for qualification here is your credit score. You need to secure a rate on the loan that’s less than 10% – closer to 5% is ideal. If you can qualify for the loan, but the rate would be 11 or 12% then that probably won’t provide the cost savings you need.
Debt consolidation loans work because they lower your interest rate. It’s not as good as no interest with a balance transfer, but you have a much longer time to pay off the debt. Most experts recommend that you should aim to get a term that’s five years or less.
A higher rate means more of each payment gets eaten away by interest charges. It takes longer and more effort to eliminate the consolidated debt. A longer term usually means lower payments, but higher total costs. At a certain point, the total cost increases so much that this solution simply isn’t cost effective.
Again, your budget plays a role in qualifying effectively. You want to set a term that gives you monthly payments you can easily afford with a balanced budget. Otherwise, you could default. However, keep in mind that reduced interest charges often mean that you can get out of debt faster even with lower monthly payments. Essentially, you find a more efficient way to pay off your debt through credit consolidation with a loan.
When you apply for a consolidation loan, use a personal loan calculator to ensure you can afford the payments; it will also help you assess total cost. If you can’t comfortably afford to pay off your debt within 60 payments, you may need a better solution!
Qualifying for a debt management program
A debt management program is an assisted form of debt consolidation. You apply for the program through a nonprofit consumer credit counseling agency. They work with you to set up a repayment plan you can afford. Then they negotiate with your creditors on your behalf to reduce or eliminate interest charges.
Qualifying for this option only requires the ability to make the payments. You credit score is not a factor. You can have a score of less than 500 and still use this solution effectively. But you have to at least be able to afford the monthly payments.
The good news is that in most cases, a debt management program reduces your total monthly payments by up to 30-50%. So, you pay less than what you pay now. If you’re just barely keeping up – or even if you’ve fallen behind – this program can give you some breathing room.
With lower payments and no credit requirement, this is the easiest option to qualify for if you’re in financial distress. You just have to willing to ask for help.