You’ve settled on debt consolidation as a way out of stubborn credit card obligations. The only problem is that interest rates on consolidation loans vary widely – from around 5% to 36%. What you need is a loan that has a rate that’s half or less than what you’re paying. Let’s look at qualifying for low interest credit card consolidation.
How Are Rates Determined Anyway?
Your credit score is key to any loan, including personal loans used for debt consolidation. That’s because it gives lenders a snapshot of how you handle credit, and whether you’d be a good risk. If you have a high score, that says that you’re more likely to repay a loan, so your interest rate will be lower. However, a low score tells lenders that you currently have, or have had, issues with financial management. This makes it risky to lend you cash and means a higher interest rate – IF you are approved.
As of last summer, the average rate for a consolidation loan was 11.09%, and the most common rates for people who had good credit ranged from 5.95% to 5.99%.
What Exactly Are Interest Rates?
Practically speaking, what does “interest rate” mean? In a nutshell, it’s the bill you get for the privilege of borrowing. Most loans use compound interest, meaning not only do you pay interest on what you borrow, you also dole out interest on the accumulated interest. The rate at which that debt increases hinges on how frequently the loan compounds. That usually occurs monthly with credit cards. If you’re only making minimum or small payments, that amount can add up.
How to Get a Low Interest Debt Consolidation Loan
First off, consolidation loans are available from large banks, credit unions, and online lenders. You want to borrow enough to cover all your debts, after which you’ll repay the lender monthly. That’s simpler than keeping track of multiple bills of varying amounts and due dates.
Qualifying for low interest credit card consolidation takes work. Shop around for the best rates. Because of the way they’re structured, credit unions tend to have relatively low rates. You should also inquire at your bank, particularly if you have an established relationship. There are also online lenders you can try. What’s good about the latter is that they initially do “soft” credit checks, which don’t hurt your credit.
Here are some steps you should take in applying for a consolidation loan:
- Check your credit report to be certain there are no inaccuracies, since some errors could be dragging down your score.
- Do what you can to improve your credit score. Even a small increase can save you cash.
- Specify how much you want to borrow. While you don’t want to borrow too much – that may get you into spending trouble – you want to be sure you have enough to cover your debts.
- Be sure you’re aware of fees such as an early termination or origination fee. Excessive fees could unduly offset savings from a favorable interest rate.
- Make certain you understand how the process works, including how long it will likely take for your loan to be processed. Don’t hesitate to ask questions.
Improving Your Credit Score
As we’ve discussed, the best interest rates require good scores – 740 or higher. If your score is below 660, you’re going to get a higher rate. Here’s what you need to do to get a better credit score:
- Keep up with bill payments.
- Try to pay off your balances monthly.
- Establish auto pay to be sure you don’t miss a payment.
- Keep credit card balances at less than 30% of your credit limit.
- Don’t apply for new credit.
- Dispute mistakes on your credit report.
If you’ve gotten yourself into a financial mess, qualifying for low interest credit card consolidation may not be easy. Still, it can be done. Follow the steps above and you’ll likely put yourself in a better financial position.
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