While buying on credit is remarkably easy and convenient, sometimes trying to keep up with the resulting bills is not. Given the average American has four credit cards — with many individuals and households having more than that — it’s easy to imagine how complicated it can become to keep up with timely payments and pay down those balances.
Using a debt consolidation loan to pay down credit card balances is one strategy consumers sometimes use to simplify their financial lives, as well as reduce the amount of interest they end up paying on the funds they’ve borrowed.
There is a catch, though. Getting approved for a credit consolidation loan, let alone qualifying for low interest rates, tends to be easier for borrowers with great credit. That’s not to say borrowers with average — or even poor — credit can’t get approved, but it can be more challenging to make it work.
So, what credit score is needed for a consolidation loan?
Let’s take a closer look.
Consolidation Loans by Credit Rating
First, let’s take a look at how the FICO credit scoring model breaks down ratings:
- Excellent: 800 or higher
- Very Good: 740 – 799
- Good: 670 – 739
- Fair: 580-669
- Poor: 580 or lower
These ranges give us a general idea of what to expect when applying for loans, as credit rating is a primary factor lenders consider when approving applications and setting interest rates.
The average interest rate on consolidation loans fall somewhere between about eight and 29 percent, although it can be higher or lower.
Here’s how ValuePenguin breaks down interest rate by credit score:
- Excellent (720 – 850): 4.52 – 57 percent
- Good (680 – 719): 6.67 – 33 percent
- Average/Fair (640 – 679): 7.05 – 32 percent
- Poor (300 – 639): 15.06 – 00 percent
This source does note, however, that many lenders require borrowers to have a minimum credit score of 580 to be eligible for a loan. However, some lenders cater to customers with bad credit; it just may require some digging to find them, and the interest rates will likely be toward the upper end of the spectrum.
How Borrowers with Bad Credit Can Get a Loan
If your credit score is somewhere south of 600 but you’d like to try consolidating your debts, don’t despair. In addition to lenders specializing in debt consolidation loans for bad credit, there are also a few tactics you can use to help minimize the risk you pose in the eyes of lenders.
Debt consolidation loans are typically unsecured, which means they’re backed by your credit rating rather than a physical asset. However, lenders may allow borrowers with credit too low for an unsecured loan to get a secured loan. This entails offering up collateral like a vehicle or a home. Your lender can seize this asset if you default on the loan, which lessens the risk factor for them and makes them more likely to approve your application.
Obviously, you should only proceed with this option if you’re sure you can keep up with the payments, lest you risk losing your property.
Another potential option is getting someone with better credit to vouch for you in the form of a co-sign. Remember, your co-signer is assuming part of the legal risk with you, so it’s extremely important you fulfill your financial obligation for both your sakes.
You’ll also want to check your credit report and dispute any errors you find, as these can drag down your credit score and hurt your chances of getting a loan.
Getting a consolidation loan with a credit score of 580 or lower is definitely more difficult — but not necessarily impossible. And, the better your score, the less you’ll end up paying in interest over the loan term.