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Credit score and debt consolidation interest rates

Written by

Shaun McGowan

Thinking of applying for a debt consolidation loan but want to know what interest rate you’ll get with your credit score? Getting a good interest rate (ideally the best on offer!) is crucial to also get the most out of your decisions to consolidate your debts.

If you’re wanting to get out of debt sooner rather than later, you’ll be happy to hear that a few steps toward understanding and improving your credit score can lead to giant leaps in progress when paying down your debts.

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How your credit score and debt consolidation loan interest rates work

Your debt consolidation loan interest rate is calculated based on your credit score, which reflects your ability to make repayments as a trustworthy borrower.

The higher your credit score is, the lower your level of risk is as a result and the better your chance at gaining approval and a great interest rate.

Lower credit scores don’t necessarily mean you will only be approved for debt consolidation loans with high interest rates, it just means you may have to deal with a lender who specialises in bad credit debt consolidation loans if you want to get approved.

In short, a higher credit rating just makes it easier to get lower debt consolidation loan interest rates - so there’s very little reason not to consider understanding and improving your credit score before applying.

What debt consolidation loan interest rate will your credit score get you?

If you are only taking your credit score in to account when applying for a debt consolidation loan:

  • Excellent credit scores provide access to the lowest rates on offer. 
  • Average credit scores may result in a debt consolidation loan interest rate up to 5 per cent higher. 
  • Low credit scores almost always result in very high interest rates.

It’s also important to understand that interest rates aren’t the only indicator of a good deal, and that debt consolidation loan interest rates are determined by several factors, not just your credit score: 

  • Your personal credit history
  • The amount you wish to borrow
  • The length of the loan period
  • The value of any collateral - if any - used on the loan
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Important: Before you agree to a debt consolidation loan, you’ll want to fully understand and assess the impact any monthly fees may have on both your monthly repayments and total loan repayment amount.

If you’re more interested in saving money than just getting a good deal, it’s important to consider the length (term) of your loan. The sooner you repay your loan amount, the greater the amount of total interest you will save.

How to get a better credit score and better debt consolidation loan interest rates

If you’re wanting to get a better debt consolidation loan interest rate by improving your credit score, you have two main options to consider.

  • First, you can hold off on making your debt consolidation loan application while you take steps to improve your credit score, pay off any defaults or outstanding debts, correct any errors on your credit report, and wait for any negative events to be cleared from your report over time
  • The second option is to apply for the debt consolidation loan at a higher interest rate and then refinance your debt consolidation loan further down the line once you’ve made consistent repayments and improved your credit score to a higher rating level. 

Only you will be able to decide which option is more suitable for your situation.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.