Using a loan to overcome bad credit might seem like a bad idea at first, and in truth if it’s not done correctly then you might end up causing more harm than good in regards to your credit rating. Not all attempts have to end in disaster. However; with careful management of your loan payments and a plan made out before you even submit your loan application, it’s entirely possible to get your finances under control and repair some of the damage that has been done to your credit in the past with a loan.
Below you’ll find some basic advice as well as common problems that you need to avoid so as not to end up creating even more credit problems along the way.
Debt Consolidation
On of the best ways to use a loan to overcome bad credit is to consolidate your outstanding debts into a single monthly payment. Debt consolidation works by allowing you to repay some or all of your previous debts with the money that you borrow, which in turn causes them to be reported as paid in full to the credit bureaus while leaving you with only the loan that you took out to repay.
It’s important that you realize that you don’t actually eliminate your debt by doing this; instead, you’re simply repackaging it into a new loan with a lower interest rate and a more manageable monthly payment. You still have the same amount to pay, it’s simply easier to pay it off in this manner.
Finding the Right Loan
In order to find the right loan you’re going to have to do some searching. Take the time to find a number of lenders in your area and online, contacting each of them to request a rate quote based upon the debt consolidation loan that you want to take out.
The interest rates that each offers may vary depending upon the amount that you want to borrow and the collateral that you’re using, so it’s important that you use a high-value collateral such as home equity to get the most out of your loan.
Managing Payments
Once you’ve applied and have been approved, it’s time to start making your loan payments. It’s important that you create a budget if you don’t have one already, since it can be easy to get in over your head when you’re trying to repay a loan otherwise. Make sure that you make your payments on time, because even one or two late payments can begin a dangerous spiral that can cause further damage to your credit over time.
Pitfalls to Avoid
To make sure that you get the most out of your loan to overcome bad credit, make sure that you don’t fall into one of the more common problems associated with this loan. In addition to making your payments on time, you need to make sure that you can stop yourself from running the balances of credit cards that you’ve paid off back up and creating additional debts simply because you can.
Since you haven’t eliminated your previous debt but you have redistributed it, the temptation to use this newfound credit availability can be overwhelming. By creating large amounts of additional debt, you can end up creating problems that you won’t be able to solve without major work or possibly even a bankruptcy.
