Getting out of debt is difficult when you have high-interest credit card balances. Chipping away at those with minimum monthly payments could take years. Getting a loan is tough if you have a low credit score. Thankfully, debt consolidation options are available, even for those with less-than-perfect credit. In this article, we’ll explain how the consolidation loan qualification process works and your other options if you get declined. 

Standard qualifying criteria for a debt consolidation loan 

Every lender has different criteria for approval for debt consolidation loans. That means an applicant who is denied by a traditional bank due to poor credit may be able to get a loan from a credit union or online lender. Most lenders look for credit scores in the mid-600s. Some lenders who accept lower credit scores might go as low as 580. 

Another factor that lenders look at is the applicant’s debt-to-income ratio (DTI). To get this number, they divide the total amount of debt the applicant pays each month by their monthly gross income. The debt portion of the equation includes credit cards, loans, rent, mortgages, and utility payments. The target DTI number for the lender is under 43%. 

Ideally, DTI should be under 33% of the applicant’s income. The lender will also check the applicant’s income and ask for verification through W2s, 1099s, and possibly recent paystubs to prove the applicant is still employed. There is no minimum income requirement for debt consolidation loans. The lender just wants to make sure the borrower can afford the monthly payments on the loan.

How to improve your credit score

FICO credit scoring, the model most used by banks, factors in five primary variables to calculate the scores. Payment history (35% of score) and amounts owed (30% of score) are the most important. To improve them, simply make all your payments on time and try to bring your account balances down as quickly as possible. That should raise your credit score. 

Here are a few ways to improve your credit score:

• Make your payments on time.
• Pay more than the minimum. 
• Keep your credit utilization low.
• Keep old accounts open.
• Limit hard inquiries

Alternatives to debt consolidation loans

If you don’t qualify for a debt consolidation loan, other options may be available to you with your current credit status, like loans for those with poor credit or a balance transfer credit card. 

Loans for poor credit

Many online lenders offer loans of various amounts to those with lower credit scores. The cost of these loans, which includes interest rates and fees, will be higher than traditional loans because of the greater risk of default by the borrower but may be lower than average credit card interest rates. 

Balance transfer credit cards

Another alternative is taking advantage of a credit card balance transfer offer. Several credit card issuers offer low- or even zero-interest on balance transfers when you first get one of their credit cards or if you already have one. Start your search for one of these offers with the credit card company you already have a relationship with. They may have an option available. 

Keep in mind that the transferred balance will likely be subject to a percentage-based or flat transaction fee. In addition, the transferred balance will need to be paid off within six months to a year, at which point the remaining balance due will be subject to a significantly higher interest rate. If you need to do a general search to find offers, use the keywords “balance transfer cards.” 

The Bottom Line

Accumulating a large amount of credit card debt can lower your credit score and make it more difficult to get a debt consolidation loan from a traditional bank. Don’t despair. Credit unions are more apt to work with their members. Online lenders often specialize in lower credit borrowing. If that doesn’t work, try using a low-interest, introductory, or promotional credit card balance transfer offer. 

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