If you have a less-than-stellar credit score in Canada, you may be wondering what the best way is to repair your credit history, and begin working towards a better future. The answer is not simple – rebuilding your credit score after a major event like a bankruptcy, or having several credit cards go to collections is quite difficult.
This has led some Canadians to turn to online personal loan providers, in hopes of quickly repaying their debt and building a better credit score. But is this a good idea, or can it lead to further financial trouble? Find out in this article.
Personal Loans Can Help Build Your Credit – But Beware High APRs
Your credit score depends on the number of revolving credit accounts (credit cards) that you have, as well as the number of installment loans (personal loans, car loans, mortgages) that you have – and how regularly you pay them down.
If you only have a single credit card and no other loans, a personal loan may seem like an attractive option to help you “round out” your credit profile, and begin rebuilding credit.
However, be careful. If you do not have a good credit score, chances are that you’re going to be paying a very high APR on a personal loan. If your FICO score is lower than about 580, you may face APRS of up to 15-25%. This means that, over the lifetime of a multiple-year personal loan, you could pay thousands of extra dollars in interest.
As a rule, rebuilding your credit score is not worth going into further debt. So if you were thinking about using a personal loan to rebuild your credit, you should probably rethink that decision.
However, there is a different kind of loan that could be used to help you build your credit score – and reduce your overall debt burden. A debt consolidation loan.
Debt Consolidation Loans – The Best Option If You Are In Credit Card Debt
If you have credit card debt, a debt consolidation loan makes it easier to repay your debts, and can even help you build your credit score.
A debt consolidation loan provides you with enough money to pay off all of your credit cards, at fixed APR that is usually lower than the APR of your credit cards. For example, you could get a loan with a 10-15% APR, which is lower than the 20% APR of most credit cards.
Then, you pay off your credit card debt, and simply repay the debt consolidation loan. Doing so can help drop your credit utilization ratio, which can help boost your credit score. And because it is an installment loan, a debt consolidation loan helps to diversify your credit mix, which can also boost your score.
Debt consolidation loans are not always a good idea. If you do not have much credit card debt, or you are worried that you cannot make a larger monthly payment for single consolidation loan, they may not be right for you.
However, when used properly, they are a powerful tool for getting out of debt, and can even help boost your credit score.
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