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How to Bid Bad Credit Goodbye with Debt Consolidation

Having bad credit can be very discouraging. Maybe you were denied for a car loan or an apartment because of your bad credit. The good news is, bad credit doesn’t have to last forever. It takes time, but there are several ways to improve your credit. Debt consolidation for bad credit can be one of the most effective ways to get back on track! Let’s take a look at how debt can affect your credit, and how debt consolidation can help to improve bad credit.

debt consolidation for bad credit

How Does Debt Affect Your Credit?

You may already know that the amount of debt you have has an impact on your credit score. What you might not know is how much weight the amount of debt has when it comes to determining your score. The top 5 factors that go into your credit score are:

  1. Payment history
  2. Credit utilization
  3. Credit history length
  4. Credit mix
  5. New credit

The amount of debt you have affects your credit score mostly in relation to credit utilization. Ideally, you should keep your credit utilization rate below 30 percent. Keep your utilization low if you are trying to improve your score. For example, if you have $1,000 of credit available to you, you should not use more than $300 of that credit. The higher your credit utilization rate, the worse off your credit score is. This is why having a large amount of debt can have a negative impact on your credit score. When you pay it off, you should see your score increase. Here are some other tips for improving your credit score:

Tips to Improve Your Credit Score

Improving your credit score is often as simple as just making your payments on-time. This includes rent, utilities, phone bills, car loans, credit cards, and student loans. Though rent, utilities, and phone bills do not technically count towards your credit score, if you miss a payment on any of these, your credit score can still take a hit.

Additionally, you should limit the number of credit cards you apply for at once. When you apply for a new credit card, it results in a hard inquiry on your credit report. Too many of these can decrease your score. Only apply for new credit cards when it is absolutely necessary. You should also hold onto your older credit cards. Don’t close out those accounts! Because the length of credit history is an important factor in determining your credit score, you should keep your oldest credit card so you can keep that history.

Finally, checking your credit report once a year is important too. Look for any errors that may be lowering your score. You are entitled to one free copy of your credit report every year from each of the three credit reporting bureaus, so take advantage of it! This can also help you to protect yourself against identity theft if you find any potentially fraudulent information on your credit report. You can get your credit report from AnnualCreditReport.com.

But what if you need to take more serious action? For some consumers, their credit may be bad, and their debt may be so overwhelming that they cannot pay it off without outside help. That’s where debt consolidation comes in!

How Can Debt Consolidation Help Bad Credit?

First things first, what exactly is debt consolidation? The exact meaning of consolidation is “the action or process of combining a number of things into a single more effective or coherent whole.” Debt consolidation takes all your unsecured debts and combines them into one loan. When loans or balances are combined, it makes a more effective and simpler repayment for the consumer.

The purpose of debt consolidation is, at its core, to get rid of debt faster with a debt consolidation company than on your own. By chipping away at your debt, your credit score should rise as the credit utilization falls.

One typical approach to debt consolidation involves taking out a loan. A new sizable loan replaces all the payments. Therefore, only one payment is needed as your other individual debts have been paid off with the new loan. The loan may be obtained through debt relief programs. However, this has several risks:

  • The interest rate on a debt consolidation loan is likely to be high.
  • The credit cards and store cards remain open, and you risk running up new debt on those cards, on top of your consolidation loan debt.
  • Consolidation loans shift your debt but haven’t really done anything to address the real cause.

This probably does not sound like an ideal option for many consumers. Is there a way to consolidate your debt without taking out a loan? Yes! American Consumer Credit Counseling offers a debt management program as a form of debt consolidation.

American Consumer Credit Counseling & Debt Management Programs

American Consumer Credit Counseling (ACCC) offers a way to consolidate your debts without having to borrow more money. How does debt consolidation work with ACCC? In short, you make one consolidated payment to ACCC each month. As a result, ACCC distributes your payments directly to your creditors.

There are several benefits to this approach beyond the simplified repayment plan.

  • Often creditors participating in this personal debt consolidation program are willing to reduce your interest rate and waive outstanding fees.
  • Credit accounts involved in the program will be closed to further spending. This way you can make genuine progress on reducing and ultimately eliminating your debt.
  • The program includes financial counseling geared toward helping you enhance your credit management skills to avoid future debt problems.

Do your Research

No matter how you choose to improve your credit score and/or pay off your debt, don’t blindly commit to a plan without doing your research first. If you choose debt consolidation or debt management, make sure the company you decide to work with is reputable and trustworthy. A credit counseling agency that administers a debt management plan should be a nonprofit, licensed in your state, have independently certified credit counselors, and ideally should have been in business for at least seven years.

If you need of credit counseling and are struggling to pay off debt, ACCC can help. Call one of our certified credit counselors today at 800-769-3571 for a free credit counseling session!

ABOUT AUTHOR / Madison

Madison is a Marketing Communications & Programs Associate at ACCC. She is excited to share her tips on saving money and being financially responsible here on the Talking Cents blog!

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