Dear Penny,

We have credit scores in the 500s and are being denied loans to consolidate our debt to improve our credit.

We understand the importance of improving our credit scores and are frustrated that the debt consolidation we were advised to apply for is not working – no approval. Who can we contact for a loan?

-D.

Dear D,

When you have an assortment of debts, life feels like a juggling act. So many maturities, so many interest rates, so many terms and conditions to follow.

Then you see the claims in the debt collection loan advertisements. Get rid of high interest credit card debt today! A minimal monthly payment!

Sounds like a little magic pill that will cure all your financial ills, doesn’t it? If only it were that simple.

Unfortunately, as you’ve learned, the people who could benefit the most from a debt consolidation loan often don’t qualify. Most lenders require a credit score of at least 620.

You can try applying through a credit union, although membership is required. Unlike the big banks, credit unions tend to look beyond your credit score to your overall financial health when looking for a loan.

You can also use websites like Credible, Even Financial, or Fiona to search for loans. (No, none of them paid me to say that.) But keep in mind that many lenders these sites partner with will also require a credit score in the 600s.

Although you can consolidate with a lower credit score, you’ll often pay astronomical interest rates – sometimes as high as 30% – which makes the cure as bad as the disease.

But here’s the thing about debt consolidation: Often the benefit is more psychological than mathematical. Sure, life would be a lot easier with one monthly payment, but if you can’t lock in a lower interest rate, debt consolidation won’t save you money.

You say you want to consolidate to improve your credit score. If you have enough money to make at least your minimum payments, you’ll gradually see your score increase as you make payments on time and reduce the percentage of your credit you’re using.

Consider talking to a credit counselor, especially if you can’t afford your minimum payments. The world of debt relief is full of scammers, so make sure that any counselor or organization you work with is a non-profit organization accredited by the National Foundation for Credit Counseling.

A credit counselor will help you understand how to manage your money and debts. The counselor can work out a debt management plan where you make a one-time payment each month to the counseling organization, which will pay your debts on your behalf. They might be able to lower your monthly payments by negotiating lower interest rates or a longer repayment period, although they usually won’t be able to lower what you owe.

Avoid companies that offer to work out a debt settlement plan, where you stop making payments so the company can negotiate to reduce your debt. Not only will these plans kill your credit, but you will also have to pay taxes on the amount that is forgiven.

It’s easy to get discouraged when you’re deep in debt and running out of options to rebuild your credit. But keep in mind that while a debt consolidation loan may improve your credit somewhat in the short term, it won’t solve the underlying causes of your debt.

Building good credit doesn’t happen quickly. You need to find a way to not rely on credit and spend less than you earn. This requires discipline and a commitment to financial health. And there is no magic pill for that.

Robin Hartill is editor at The Penny Hoarder and the voice behind Dear Penny. If you have a question about debt, email [email protected] and you might see your question answered in an upcoming column.