Debt consolidation can be a good option for consumers who are struggling to pay off debt on their own. However, getting debt consolidation loans with bad credit can be difficult. When you apply for any loan, you need to have good credit to get approved and get a good interest rate. ACCC explains how to navigate debt consolidation loans with bad credit.
What is considered “bad credit?”
FICO scores range from 300 to 850. A score of 700 is typically considered good. A score of 750 or higher is considered very good, and 800 or higher is considered excellent. So what would constitute a “bad” score? Generally, a score below 670 is not good, and anything lower than 600 is considered bad.
If your credit score isn’t where you would like it to be, don’t panic. It may take a few months, but there are ways to fix a bad credit score. The most important thing to do is to pay your bills on time. This includes credit card bills, car payments, mortgage, etc. Payment history is the most important factor that goes into your credit score. The next most important factor is your credit utilization rate. Try not to use more than 30% of your available credit.
Should you apply for debt consolidation with bad credit?
If you’re overwhelmed by the amount of credit card or other unsecured debt you owe, debt consolidation is one option available. But what if you have a bad credit score? Should you still apply for a debt consolidation loan? Think about it this way. The point of a debt consolidation loan for many consumers is to combine your debts into one simple monthly payment and get a lower interest rate.
However, if you have a bad credit score, you probably won’t get a low interest rate if you get approved for that loan at all. It defeats the purpose of the debt consolidation loan in the first place. Also keep in mind that every time you apply for a new loan or line of credit, including for debt consolidation, it results in a hard inquiry on your account. Too many hard inquiries can hurt your score. Applying for debt consolidation with bad credit is probably not the best option for you.
What are the alternatives?
There is a way to consolidate debt if you have a bad credit score, but it doesn’t involve an actual debt consolidation loan. A debt management program is administered by a nonprofit credit counseling agency. This program consolidates your debts into one monthly payment, but it is not a loan. The interest rates in the debt management program are lower than what you would be paying otherwise because the credit counseling agency negotiates with the creditors on your behalf. They also negotiate lower or waived fees. There are no credit score requirements to be in a debt management program.
To get started, simply call the credit counseling agency and explain your situation. They will take you through a credit counseling session, in which they ask about your income, expenses, assets, and liabilities. From there, they help you come up with a budget and determine whether a debt management program is the best option for you. Everybody’s financial situation is different, and if a debt management program isn’t right for you, the credit counselor can point you in the right direction. They may refer you to legal/social services or bankruptcy if necessary.
Debt consolidation loans with bad credit are probably not the best idea. But, it is not the only option for debt relief. Debt management programs offer similar benefits without taking out a loan. Calling a credit counseling agency is a great place to start if you are unsure what option is right for you!
If you struggle to pay off debt, ACCC can help. Sign up for a free credit counseling session with us today!