How to Improve Your Credit Score Before Applying for a Debt Consolidation Loan

Before you apply for a debt consolidation loan, it is a good idea to review your credit score first. This will help give you an idea as to how likely you are to be approved for a debt consolidation loan, the interest rates, and how favourable the terms of the debt agreement will be to you.

If your credit score is lower than you would like it to be, don’t worry. There are steps you can take to correct any discrepancies in your report and potentially turn your past negative credit activity into positive actions that help improve your credit score.

Here are 7 effective ways to help boost your credit score before you apply for a debt consolidation loan.

Key takeaways

  • By improving your credit score before you apply for a debt consolidation loan, this could put you in a better position to negotiate a lower interest rate or ask for a higher loan amount.

  • Some of the most effective ways to improve your credit score are to pay off your existing debts and loans on time, report any inaccuracies in your report, and avoid applying for multiple credit or loan products.

  • The introduction of the CCR (2014) means that positive credit behaviour can help shift the balance back in your favour, even if you have a history of bad credit behaviour.


1. Pay Off Your Existing Debts and Loans on Time

In 2014, the introduction of the Comprehensive Credit Reporting (CCR) was a major turning point for Australia. Prior to the advent of the CCR, a person’s credit history would mainly show past bad behaviour, such as frequent missed or late payments and defaults. The CCR changed this by making it mandatory for credit reports to include positive information about a person’s credit history, such as timely repayments on credit cards and loans.

Fast forward to today, and this strategy still works. If you’re not happy with your existing credit score, get to work on paying off your existing debts and loans on time. It might take a few months, or possibly even up to a year, but after enough continuous timely payments, your credit score should begin to improve.


2. Check For Errors In Your Credit Report

Thoroughly review the details of your initial credit report. Take note of any details you suspect may be wrong. Depending on how far back the credit report goes, whether it be several months or years, it may be hard to recall the extent of all your financial actions.

If this is the case for you, then cross-reference the information in the report with other documentation such as online bank statements, utility bills, receipts, and invoices. If something doesn’t add up, you can submit a request for correction through the agency that issued the report. You can also contact the credit provider directly for further clarification.


3. Avoid Applying For New Credit

Usually, when you apply for a new credit or loan product, the date of the event will show up on your credit report – even if your application is unsuccessful.

This means that if you apply for multiple new credit or loan products too close to each other, this may indicate to a lender that you are under credit stress, and they may refuse you a loan. Or alternatively, even if your application is successful, you may be subject to higher-than-usual interest rates compared to if your credit score was in a better position.

To prevent this from happening to you, avoid applying for too many – if any at all – credit or loan products too close to each other. Even if your application is successful, the potential for higher interest rates will negatively impact your ability to meet your repayment obligations.


4. Pay Your Utility Bills On Time

When you miss the original date for a utility bill payment, for example, you typically have up to 60 days to pay off the bill and receive no penalty to your credit score. However, if the bill is still overdue after this period, you may receive a default notice on your credit report.

Defaults are a significant black mark to have on your credit report, so you want to avoid having them there at all. Otherwise, it will bring into question your ability to repay a loan, which could make it harder for you to apply for a debt consolidation loan. Worse still, defaults stay on your report for up to 5 years, so they will stick around for a long time.

To stay on top of your utility bills, consider setting up an automatic payment system. This way the owed money will be automatically taken out of your account and sent to the utility provider. Of course, you need to make sure there is enough money in your account, on the day of when the direct debit will occur.


5. Reduce the Amount of Debt you Can Accrue on Your Credit Cards

If you are struggling with credit card debt, consider reducing your credit limit. This will put a firm limit on the amount of debt that you are allowed to accrue on your credit cards.

Of course, if you are already struggling with reaching a high debt amount, then placing a hard limit on that debt amount won’t fix the problem overnight. You will still need to review your situation, determine why you are reaching your credit card debt limit in the first place, and take the necessary steps to correct the situation.

So, this approach goes together with other positive debt reducing strategies, such as cutting back on unnecessary or excessive spending and prioritizing repaying certain debts over others. You may also be able to perform a credit card balance transfer, where you transfer the debt of one credit card to a new credit card, one that has a low or zero interest period. As a result you will pay less on your monthly credit card debt repayments, as the interest will be either less than before or completely non-existent.


6. Pay Off Higher-Interest Debts First

High interest debts tend to be the hardest to remove, even if they’re not the highest in value among personal loans. Why? Because the effects of a high-interest debt are harder to see than debts with a less high interest debt or high dollar amount.

It’s easy to look at a high-value debt and think that you should pay that one off first. But, in fact, high-interest debts can end up costing you more than lower value debts – especially if you leave them on the back burner for too long. They will gradually accrue snippets of interest, chewing away at your balance, sapping you of your finances.

To solve this dilemma, try to prioritize your high-interest debts first, even if they’re not the highest in value. Do this, and you could potentially save money, as well as improve your credit score.


Improving Your Credit Score For a Better Tomorrow

Facing multiple debts can be a confronting situation. But by taking the steps to review your overall debt situation, take control of your finances, and work towards improving your credit score, you will be better equipped to apply for a debt consolidation loan.

Lenders and agencies will be more likely to review your financial situation in a positive manner. You may be in a better position to negotiate a lower interest rate, lower associated fees, or even ask for a higher loan amount if necessary.

Either way, the process will be much smoother sailing on your end, and you will be far less likely to sink further into debt if you are already on your way to a better financial future.

Need help creating a strategy to reduce debts? Get in contact with our team for an obligation-free consultation. It only takes 60 seconds to get started and doesn’t impact your credit score.