Debt consolidation can be a good option for consumers who are overwhelmed by high interest credit card debt. However, in order to get a better interest rate through consolidation, you need good credit. But what happens to consumers with bad credit? Should they seek alternative options? ACCC explains the pros and cons of consolidating debt with bad credit.
Should you consider consolidating debt with bad credit?
Debt consolidation involves taking out one loan to pay off multiple unsecured debts. This loan usually has a better interest rate than your credit cards, so it saves you some money. As with any other loan, you get a better interest rate on the loan if you have good credit score. If your credit is below 700, you may not get the best interest rate. You may not even get approved at all. Because of this, you should probably look into other options besides consolidating debt with bad credit.
Debt Management Plan
There are alternative options for those who have bad credit. Technically, consolidating your debt with bad credit isn’t impossible. One of the best options that doesn’t require a good credit score is a debt management plan. A debt management plan works like debt consolidation in that it combines all of your unsecured debt into one monthly payment. However, it is not a loan. There are also no minimum credit requirements. A debt management plan is administered by a nonprofit credit counseling agency, and they negotiate with creditors to get you lower interest rates and waived fees. Clients in a debt management plan with ACCC can get out of debt in five years or less.
Debt Payoff Options to Avoid
Some options for paying off debt do more harm than good. Debt settlement is one such option. When you settle your debt through a debt settlement agency, you don’t pay off the principal amount. For example, if you owe $10,000 in credit card debt, a debt settlement agency can negotiate with the creditors so you only have to pay $7,000. This can seriously damage your credit score. If your credit wasn’t good to begin with, you could have a very hard time building it back up again after debt settlement.
Additionally, the $3,000 that you supposedly saved by settling can be counted as income by the IRS and can increase your taxable income for the year. Debt settlement agencies also charge high fees, so in the end, you probably aren’t saving any significant amount of money.
Final Thoughts on Consolidating Debt with Bad Credit
Consolidating debt with bad credit may not be possible through a traditional debt consolidation loan, but instead through a debt management plan. A debt management plan can help you improve your credit score as you pay off your debt. When you finish the debt management plan and have a better credit score, you can rest assured that you will get good interest rates on any future loans and lines of credit. Just be sure to use credit responsibly!
If you struggle to pay off debt, ACCC can help. Schedule a free credit counseling session today.