Consolidating Debt with Bad Credit

It’s a fact: you generally need “fair” or better credit to get a debt consolidation loan. The best interest rates go to those with the best scores, and if your score is south of 580, you may have a difficult time snagging a loan. Here’s what you need to know about consolidating debt with bad credit.

What is Debt Consolidation?

Let’s start there. This financial strategy involves getting a loan to pay off your high-interest credit card debt. The idea is to save money, since you’re seeking a loan with a lower interest rate than what you’re now paying. You also want to make bill paying simpler, and this method does the trick: it only requires a single monthly payment of the same amount and due date. No more keeping track of multiple balances.

Consolidation can take the form of personal loans, debt management plans, credit card balance transfers, and more.

Consolidating Debt Without Great Credit

With FICO, the commonly used scoring model for lenders, scores range between 300 and 850. Depending on the actual figure, scores higher than 670 are deemed good, very good, or exceptional. A fair score, meanwhile, ranges from 580 to 669, and anything under 579 is listed as poor. Debt consolidation loans for poor credit can be had, but it’ll take some doing.

Consolidating with a Personal Loan

If you have poor credit, you still have options, although you’ll likely have to pay through the nose in interest. You might want to consider an online lender such as Upstart, which looks at alternative data – beyond your credit score – such as education, length of employment, and how long you’ve lived at your residence. 

What’s the Upside to a Debt Consolidation Loan?

For one thing, you’re ridding yourself of the necessity of paying multiple lenders each and every month. When you combine all your current debt into a new loan, you only pay your new lender, which can also help keep you from inadvertently missing a payment. After all, your payment history is the chief factor in figuring your credit score, and a single missed payment can make your score dip noticeably.

Most of the time, your new loan will have a markedly lower interest rate – otherwise, the strategy may not be wise for you. A lower interest rate will save you cash over the life of the loan.

How Do I Qualify for a Debt Consolidation Loan?

The truth is that, if you have a poor credit score, a debt consolidation loan may not be within your reach. Lenders view those who have had trouble managing credit as too risky. You also don’t want a loan with an interest rate that doesn’t improve upon what you’re now paying.  

If you have time, it may be better to shore up your credit profile before applying for a debt consolidation loan. Even fixing seemingly small errors on your report could have a positive impact.

Alternatives to Debt Consolidation

For some people, an alternative to debt consolidation could be a better option. Such alternatives may include:

  • Debt management. This entails working with a credit counselor to craft a debt repayment plan. After a plan is established, the counselor may try to negotiate with your card issuers to see if you can get better terms. This may be a good alternative for those who may not gain approval for a consolidation loan.
  • Debt settlement. Here, you hire a company such as Freedom Debt Relief to negotiate with your creditors to see if you can pay just a portion of what you owe to “settle” your debt. This strategy works best for someone who can’t see themselves paying off their debt on their own within five years.

Consolidating with bad credit is both difficult and doable, but is it the right strategy for you? Perhaps an alternative is better. In any case, size your options up against your situation, and you’ll ultimately make the right choice.


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