If you are considering debt consolidation loans and fair credit is the grouping where your credit score currently stands, you are literally in a position where things can go either way and the moves you make will go along way in determining which side of the credit river’s shore that you end up on. This is where you need to make solid choices in order to spring forward.
I’m not kidding when I say that debt consolidation loans with fair credit is literally the apex of walking a debt management tightrope. It’s the position with the most at stake, as I see it, as good credit and above has some breathing room and bad or poor credit group members can mostly only go up – to get decent rates on personal loans. Sure they can spiral down further but then those people need to start looking at credit management plans and bankruptcy as a last resort because at that level personal loans become much harder to get approval on or even make work if the rates are at the higher end.
And that said, I need to reiterate this point as I do in most of my posts as you cannot effectively change your financial life simply through debt consolidation loans alone. Consolidation loans simply help you move debt into a place that is more manageable so that you can pay it off at a date certain but YOU MUST CHANGE THE BEHAVIOR THAT GOT YOU WHERE YOU ARE, where possible.
… Or is it chillin the post or playin the post from one of those old RUN DMC songs from the 80’s? Whatever it was, don’t just wait around in limbo. Do something proactive and doable to help yourself. It starts with you but I’m here to help you because I’ve done it too.
Using personal loans to refinance and consolidate credit card debt is a method I have personally used to manage my finances and bring my credit scores up from the lower 600’s into the 800’s. And that was after a Chapter 13 bankruptcy. This is what you can do as well and I will show you how to do it too. And sure, if you want, we can help you here through our partners at Loan Camel, to get started with the right Personal Loans.
But to be effective, in a life-changing way after you get the loan where you can rise towards the top of the credit pecking order, you need to change your spending habits, where possible, that got you where you are now finding yourself as mentioned. On the loan side of it, you need to do things with an understanding of why you are doing them. You have to understand how scoring works and what factors in most.
If you don’t understand it all, don’t sweat it. I’m a multi-degree holding, highly educated former practicing lawyer and I didn’t understand it all. In hindsight my smart ass didn’t know sh-t… and I paid for it. If you’ve read my About Us sob story you’d already know that but you won’t make the same mistakes I did, people. I suffered so you don’t have to.
And if you do know it all already, great, you can go check your rates and scores now to see where you stand through Loan Camel but make sure you really understand it. You’ve got a lot riding on this and you can set yourself up nicely for the next phase if you do as I did to bounce back.
There are 2 things that you need to understand at this point when it comes to credit scoring:
1. You’re a faceless electronic file in a group of other faceless, numerically ranked, strictly defined risks in massive electronic folders.
Welcome to the wonderful world of credit and finance! The credit bureaus and lenders aren’t interested in shooting the sh-t with your credit/loan file and really understanding what makes you and your 630 score tick, why you’re different, where you and your finances went to school for the 5th grade. You’re a widget factory product to them like they used to teach us about production models in the 80’s in college economics classes.
2. Not all credit scores are created equal.
Equifax, Trans Union and Experian are the 3 major credit bureaus, each with their own scoring. So you have 3 different scores,,, and then there’s FICO, your 4th score. Your FICO score is based on an algorithm which combines information on your reports from the three credit bureaus and then FICO spits out a score which about 90% of the top lenders – according to FICO – rely on when making credit decisions.
So while FICO’s the de-facto credit score mob boss, shot caller baller, your scores from each credit bureau fall into ranges which then determine your credit rating and class for each bureau plus there’s the almighty FICO. There are now different levels and types of FICO scoring but that isn’t important for this post. In general, the chart below from FICO depicts credit score groupings by ranges along with a percentage of the population that falls within each of the ranges:
The following is how Experian classifies credit groups courtesy of Experian at Experian.com:
|Credit Score||Rating||% of People||Impact|
|300-579||Very Poor||16%||Credit applicants may be required to pay a fee or deposit, and applicants with this rating may not be approved for credit at all.|
|580-669||Fair||17%||Applicants with scores in this range are considered to be subprime borrowers, meaning their credit standing is less than what is normally desired.|
|670-739||Good||21%||Only 8% of applicants in this score range are likely to become seriously delinquent in the future.|
|740-799||Very Good||25%||Applicants with scores here are likely to receive better than average rates from lenders.|
|800-850||Exceptional||21%||Applicants with scores in this range are at the top of the list for the best rates from lenders.|
As you can see, between 84% of the population has a fair or better credit score, if you start the definition of “fair” at 580 on Experian or 71% have a “fair” credit score per FICO, if you start the definition of “fair” at 600.
To me, anything below 600 cannot be considered fair, and really, I think fair credit starts around 640 for a number of lenders. More pointedly, about 10% of all credit classifies as “Fair Credit” according to this data, so if you fall into this group, you are not in a larger class of potential borrowers. That’s what’s shocking. Fair isn’t average, rather, “Good Credit” is average, and more particularly – very good credit.
So what do you need to do?
The first thing you need to do is get a hold of your credit report and see where you stand. You can do that directly online through any of the 3 credit bureaus. If you can get your FICO score, even better. Knowing where you stand will assist you in knowing where your value lies in the lending market as a borrower.
Next, look at all of your revolving credit card debts – and even existing loan debts as well – and add up the minimum monthly payments. Guaranteed you will be paying for an eternity if you keep paying at or close to minimum.
Check your rates here without impacting your credit. Look at both 36 and 60 month payment options and see how the new monthly payment would fit within your budget. If you find a loan which works, take it.
Not only must you make all payments on time, and with automatic withdrawal – that means having enough money in your account each month to cover the payments – but you cannot go back to racking up bills on your credit card. You are going to have to learn to love your debit card, except in instances of emergencies or for rental cars and such, and then you need to pay it off rapidly – no more than 3 months if possible if you are stretched.
Leave every one of your credit cards, now with zero balances, open. DO NOT CLOSE YOUR ZERO BALANCE ACCOUNTS!!! You can occasionally make purchases that you pay off immediately to keep the activity at a minimum, if you want to. Every so often I have to make a purchase on my Target Red Card to keep it open. So what’s the point – I paid them off?
In essence, what you have done is doubled your credit line and decreased your credit utilization percentage. After a potential initial drop in scores, your scores will go way up. As your loan nears a successful close, your scores will go even further.
Please keep in mind that if you had previously received negative remarks on your credit report or did a Chapter 13 bankruptcy, those remarks remain for 7 years (10 years for a Chapter 7 bankruptcy). Once those remarks drop, your score will shoot up further. I had scores in the high 600’s/low 700’s before my Chapter 13 dropped from my report.
Types of credit (credit mix), utilization and payment history are huge portions determining your credit score and you can do a lot to manage your debts to increase your scores like I did. 35% of your score on FICO is payment history. That is the most important single determining factor taken into account in scoring so you MUST pay bills on time. If you don’t, you will never succeed… until you start to be a prompt payment pro for an extended period.
You can do it. You got this! I did it and I have ADHD amongst a number of issues. And I’ve got an army of shrinks at the ready to confirm this.
Yes… if you consolidate your debts into one loan with one easy payment it will make life more manageable but keep that benefit in perspective. More importantly, pay that sucker down each month and do not rack up new credit card debts. Skip some unnecessary purchases and learn to love your debit card.
Do you know how much more powerful I feel walking out of a store having made a smaller purchase via my debit card than any purchase, let alone a bigger one, on a credit card? Embrace your knew power. Take comfort in everyday being a day closer to your goal.