Using Debt Consolidation Loans To Improve Bad Credit

Over the last few years, I have improved my personal credit score drastically. The first time I checked my score, it was around 500! I learned all about credit and started taking steps to improve. I now sport a score of almost 800 (and rising). During that process I learned a lot and would like to share a few insights.

30% of your FICO score is based on your outstanding debt. That means that 255 points of a possible 850 is calculated by looking at the amount of debt you currently have. The biggest percentage of that aspect is made up of the percentage of your revolving credit that’s being used.

Examples of How Revolving Credit Affects Your Credit Score

Let’s say that you have $20,000 worth of credit lines by way of credit cards. If you have this much available credit it can be an awesome thing, as long as your actual balance is low. Let’s say that you manage your credit well and pay off your cards each month. In that case your revolving balance would be $0. This would be a huge boost and you could expect to have a very high score for this aspect – probably close to 255 points.

On the other hand, if you carry an $18,000 balance on your cards it will affect you negatively because you would be using almost all of your available credit. You could expect this part of your score to be quite low, maybe around 50 out of a possible 255 points.

Remember that this part of the score is calculated by using the percentage of available credit that’s in use. If your available credit was $200,000, using only $18,000 wouldn’t affect you negatively much.

Debt Consolidation Loans For People With Bad Credit

Using debt consolidation loans can have a huge, healthy affect on credit for people who use them to pay down credit cards. Let’s say that you’re a person who is using $18,000 of your $20,000 in available credit. Using a debt consolidation loan to pay down that debt will really boost your credit score. The loan will show on your credit but that type of debt is much healthier for your score.

Getting Debt Consolidation Loans With Bad Credit

These loans are structured primarily for people with bad credit so this isn’t usually a problem. Most companies that provide these loans are set up for people with bad credit. Generally speaking, these loans don’t have awesome interest rates anyway. They aren’t secured and were designed to improve credit card interest rates. Since credit card interest rates are extreme, the loans don’t have to be that great to offer an improvement.

If used wisely, debt consolidation loans can be a remarkable tool that can really help you to improve your credit. This will improve your buying power which is the name of the game when it comes to personal finances. This will allow you to save more and pay off other debts and obviously that’s a huge deal if you care about keeping your finances in order. It will also help you to be more eligible for future loans and more attractive interest rates.