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How Debt Consolidation and Refinancing Can Help Overcome Bad Credit

How Debt Consolidation and Refinancing Can Help Overcome Bad Credit

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In financing, a credit score is a number that represents how likely a borrower can repay debts based on credit history. This score can affect the ability to access credit products, such as personal loans, credit cards, home loans and car loans. A higher score means a better credit rating and a lower risk of defaulting on your repayments. A borrower with good credit usually enjoys more opportunities to achieve financial goals, such as buying a home or car or starting a business, and saves money with lower interest rates and fees on credit products. 

Generally speaking, maintaining good credit is always in one’s best interest because it demonstrates to financial institutions that you are in total control of your finances. 

What is a credit score, and how is it calculated?

A credit score summarises credit history, a record of how you have managed your debts and repayments. Credit reporting agencies collect information from lenders, utility providers, phone companies, and other sources to create your credit history and calculate your credit score.

Your score will be between zero and 1,000 or 1,200, depending on the credit reporting agency. A higher score means the lender will consider you less risky, which could mean getting a better deal and saving money. A lower score will affect your ability to get a loan or credit.

Credit reporting agencies use different factors to calculate credit score, such as:

  1. Repayment History: whether bills and loans are paid on time or not.
  2. Credit Enquiries: the number of credit applications made and with whom.
  3. Credit Accounts: the types of credit a borrower has, such as mortgages, personal loans, credit cards, etc.
  4. Credit Limits: how much credit is available to the borrower and how much has been used.
  5. Personal Information: age, employment status, address history, etc.
  6. Public Records: any court judgments, bankruptcies, or insolvencies that may affect your creditworthiness.

Understanding Bad Credit

In contrast, if one loses control of finances, a bad credit rating is often the outcome. It can be an onerous burden to carry with the challenges and limitations of the status.

Bad credit describes a low or negative credit score, which indicates a higher risk of defaulting on loans or credit obligations. Having bad credit can have serious consequences for personal finances, affecting one’s ability to borrow money, access services, and achieve financial goals.

What are the impacts of bad credit on personal finances?

Bad credit can make it harder for borrowers to achieve financial goals and access the needed services. Some of the impacts of bad credit are:

  • Difficulty getting approved for loans or credit cards: Lenders may reject your application or offer less favourable terms, such as higher interest rates, fees, or lower loan amounts.
  • Higher borrowing costs: If you get approved for a loan or credit card, you may have to pay more in interest and fees over the life of the loan, which can add up to thousands of dollars.
  • High interest rates and costly penalties: If you can get loans, they usually come with high interest because you are considered a high default risk. This condition can make your payments more unmanageable, increasing your chances of defaulting and opening you to costly penalties.
  • Reduced access to services: some service providers, such as phone companies, utility companies, or insurance companies, may require a credit check before they offer you a contract or a policy. With bad credit, you may be denied service or charged higher premiums or deposits.
  • Lower chances of renting or buying a home: landlords and real estate agents may check your credit history before renting or selling you a property. With bad credit, you may need help finding a place to live or have to pay a higher bond or rent.
  • Impaired career prospects: some employers may check your credit history as part of their background screening process. With bad credit, you may miss out on job opportunities or promotions.

How can bad credit be improved?

If you are one of those burdened with bad credit, fear not because it does not automatically mean the end of the world. You can still take steps to improve your credit scores and restore your control over your finances.

Some of the strategies available are:

  1. Check your credit report and score regularly: you can get a free copy of your credit report once a year from each of Australia’s three leading credit reporting agencies: Equifax, Experian, and Illion. You can also get a free credit score from some websites or apps. Checking your report and score can help you identify any errors or discrepancies affecting your score and dispute them with the relevant agency or creditor.
  2. Pay your bills and loans on time: one of the most critical factors that affect your credit score is your repayment history. Paying your bills and loans on time every month can demonstrate good financial behaviour and boost your score. You can set up direct debits, reminders, or budgeting tools to help you stay on top of your payments.
  3. Reduce your debt and limit new applications: another factor that affects your credit score is your level of debt and how often you apply for new credit. By paying off your existing debt and avoiding unnecessary applications for new credit, you can lower your debt-to-income ratio and improve your score. You can also contact your creditors and negotiate lower interest rates or payment plans that suit your situation.
  4. Build a positive credit history: if you have no or limited credit history, you may also have a low credit score. To build a positive credit history, you can start with small amounts of credit that you can manage easily and repay on time. For example, you can use a secured credit card, a low-interest personal loan, or a credit builder product that reports your payments to credit agencies.
  5. Seek professional help: if you are struggling with debt or have complex financial issues, you may benefit from professional help. You can contact a financial counsellor, a debt agreement administrator, or a bankruptcy trustee for advice and assistance on dealing with your debt and improving your financial situation.

Restore Your Credit Score With Debt Consolidation

Settling burdensome loans is one more concrete step to recover from bad credit. While this task might appear daunting, especially when you are saddled with multiple loans, there is one sure way to get back on track – through debt consolidation.

Debt consolidation simplifies your debts by combining them into one payment. It can help you lower your interest rate, monthly payments, or both. It can also help you quickly organise and clear your debts by remembering only one due date and a fixed payment schedule. Debt consolidation can be done through a debt consolidation loan or a balance transfer credit card. However, debt consolidation does not reduce the amount of debt you owe, and it may have some risks, such as affecting your credit score or extending your repayment period. Therefore, you should carefully weigh the pros and cons of debt consolidation before applying for it.

Refinancing and Debt Consolidation: How They Work Together

If you have multiple debts, such as credit card balances, personal loans, or car loans, you may be looking for a way to simplify your payments and reduce your interest costs. One possible solution is to use refinancing and debt consolidation together.

Refinancing replaces an existing loan with a new one, ideally with better terms and lower interest rates. Debt consolidation combines multiple debts into one payment, usually with a lower overall interest rate and a more extended repayment period.

By refinancing and consolidating your debts, you can achieve several benefits:

  1. You can lower your monthly payments by extending the loan term and reducing the interest rate.
  2. You can save money on interest over time by paying less on your total debt.
  3. You can simplify your finances by having only one loan to manage and one due date to remember.
  4. You can improve your credit score by paying off your high-interest debts and reducing your credit utilisation ratio.

Debt Consolidation with Bad Credit

If you are struggling with multiple debts and high-interest rates, you may wonder how to consolidate debt with refinancing, even with bad credit. Debt consolidation is a loan that allows you to combine your existing debts into one loan with a lower interest rate and a single repayment. Refinancing is when you replace your current home loan with a new one from the same or different lender. You can use the equity in your home to refinance your mortgage and pay off your other debts.

However, refinancing to consolidate debt is not a simple process and may not be suitable for everyone. There are some things you need to consider before you apply for a debt consolidation loan, such as:

  • Your credit score: A bad credit score can make getting approved for a refinancing loan harder, as lenders may see you as a risky borrower. You can check your credit score for free on ClearScore AU and see what factors affect it. You can improve your credit score by paying your bills on time, reducing your credit card balances, and avoiding new credit inquiries.
  • Your equity: Equity is the difference between the value of your home and the amount you owe on your mortgage. The more equity you have, the more you can borrow to consolidate your debt. However, if you have less than 20% equity in your home, you may have to pay Lenders Mortgage Insurance (LMI), an extra cost that protects the lender if you default on your loan.
  • Your costs: Refinancing your home loan to consolidate debt may involve fees, such as application fees, valuation fees, stamp duty, and break fees. You should compare these costs with the potential savings from consolidating your debt and see if it is worth it. You can use any free mortgage switching calculator online or ask your trusted mortgage broker to compare the interest and fees of different loans.
  • Your risks: Refinancing your home loan to consolidate debt means turning your unsecured debts (such as credit cards or personal loans) into a secured debt (your mortgage). This risk means that if you fail to repay your new loan, you could lose your home or other assets that you used as security. You should also avoid taking on more debt after consolidating, as this could worsen your situation.

Seek Professional Advice From Experts

Suppose you decide that refinancing to consolidate debt is right for you. In that case, you should shop for the best deal and look for a reputable lender offering competitive interest rates and flexible repayment options.Look for specialised lenders that provide debt consolidation loans for bad credit scores and offer personalised solutions for customers. 

Alternatively, you can seek professional advice from a licensed mortgage broker who can help you find the best refinancing option. A mortgage broker can assess your financial situation and goals, compare hundreds of loans from different lenders, negotiate on your behalf and guide you through the application process. 

Tiger Finance is one such company. It is an experienced bad credit firm partnered with over 30 of the top lenders in the country to offer the most comprehensive array of loan options to fit any refinancing requirement. As a specialised mortgage broker, Tiger Finance strives to make it simple and easy for every Australian to get the funding they need to achieve their big life goals. 

Take Back Control With Debt Consolidation

Refinancing your home loan to consolidate debt can be an intelligent way to simplify your finances and save money on interest. However, it takes more than a quick fix and requires careful planning and budgeting. You should weigh the pros and cons of refinancing and seek professional advice if unsure.

Refinancing your home loan to consolidate debt is not a decision to be taken lightly. But it can also be your way to reclaim control of your finances and extricate yourself from bad credit. Here are some steps you need to take to refinance your home loan to consolidate debt:

  1. Know how much equity you have in your existing loan to utilise. Equity is the difference between the value of your home and the amount you owe on your home loan. The more equity you have, the more you can borrow to pay off other debts. However, remember that most lenders will only let you borrow up to 80% of your home’s value without charging Lenders Mortgage Insurance (LMI), an extra cost that protects the lender if you default on your loan.
  2. Know your credit score. Your credit score is a number that reflects your credit history and how likely you are to repay your debts. The higher your credit score, the better your chances of getting approved for a refinancing loan and the lower your interest rate. You can check your credit score for free on ClearScore AU.
  3. Gather your essential application documents. These may include Your recent payslips, Existing loan details, and Pay-out amounts for debts to be consolidated. You will need these documents to prove your income, expenses, and liabilities to the lender. Based on these factors, the lender will assess your ability to repay the new loan.
  4. Understand your refinancing costs. These may include fees or Lender’s Mortgage Insurance (LMI). Refinancing your home loan may involve some fees, such as application fees, valuation fees, discharge fees, or break fees. You may also have to pay LMI if you borrow more than 80% of your home’s value. LMI can be pretty expensive, so make sure you factor it into your calculations. You can use the mortgage switching calculator to compare the interest and fees on a new loan with your current loans.
  5. Compare different refinancing options. Once you know how much you can borrow and what it will cost, you can shop around for other refinancing options from various lenders. You can use online tools such as Savvy or loans.com.au to compare different interest rates, features, and benefits of different refinancing loans. Look for a loan that suits your needs and budget and will help you save money in the long run.

At Tiger Finance, we always guide you every step of the way with loan experts well-versed in the current situation in the world of financing. You can get a free consultation with our in-house financing expert without obligation to give you the most accurate picture of your loan situation today.

Contact Tiger Finance today so that we can help you begin your journey to secure the exact hassle-free loan product that you need.

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