How to Consolidate Debt with Bad Credit
Even if you can’t qualify for a loan, you can still find relief.
Credit card consolidation allows you to lower your monthly payments and reduce interest charges so you can eliminate debt efficiently. The only problem is that most debt consolidation solutions require you to have a good credit score to qualify. If you have bad credit, you either can’t qualify or can’t secure the interest rate you need to benefit.
So, how do you solve debt problems if you don’t have the credit score necessary to qualify for consolidation?
The answer: Nonprofit consumer credit counseling
Consolidating credit cards through a credit counseling service
When you consolidate credit cards through a credit counseling service, your credit score is not a factor. Instead, you only need to be able to meet the adjusted payment schedule on your debt customized Debt Management Plan.
Here’s how the process works:
- You contact a credit counseling agency to request a free evaluation.
- A certified credit counselor reviews your budget, debts and credit to see where you stand.
- If you have bad credit, this eliminates any do-it-yourself relief options, because you won’t be able to qualify.
- However, as long as the credit counselor can verify your income, you can usually find a Debt Management Plan payment that works for your budget.
- Once you craft a repayment plan that you can afford, the counseling team starts to negotiate with your creditors.
- The counseling team also negotiates to reduce or eliminate interest charges and stop future penalties on each debt.
- Once all your creditors agree to the program, your payments start; you pay the credit counseling agency one payment each month and they distribute the funds on your behalf.
- This helps build positive credit history and reduces your credit utilization ratio, which are two driving credit score factors. As a result, your bad credit score often improves when you complete a Debt Management Plan successfully.
At the same time, you can access free resources that the credit counseling agency offers. These can help you learn how to live without relying on credit so you can avoid debt in the future. Here’s one example of how a debt management program helped a client take control when retail therapy went off the rails:
[On-screen text] “Retail Therapy” is a risky financial habit that often leads to debt
Narrator: The term retail therapy refers to when someone shops to relieve stress or improve their mood.
[On-screen text] You feel better in the moment, but regret it later when the bills come in
Narrator: People shop until they drop to make themselves feel better. But in the process many people incur a mountain of high interest rate credit card debt that’s tough to repay.
[On-screen text] A DEBT MANAGEMENT PROGRAM HELPS YOU TAKE CONTROL OF DEBT
Narrator: When a person enrolls in a debt management program they consolidate unsecured debts into one single monthly payment.
[On-screen text] Our credit counseling team negotiates to reduce or eliminate interest charges!
Narrator: Credit counselors negotiate lower interest rates.
[On-screen text] Lower APR = More of each payment goes to eliminate your balances
Narrator: And that means the debt will be paid off faster, even though they may pay less each month.
[On-screen text] Free resources help you learn better habits
Narrator: And during enrollment clients get access to a variety of free resources, teaching them better money habits.
[On-screen text] Don’t end up in the same situation again!
Narrator: So, once they get out of debt, they can stay that way.
[On-screen text] Miriam completed a debt management program in 3 years and had this to say…
Narrator: That’s what debt management program graduate Miriam did and it took her just 3 years to eliminate her debt while learning better ways than retail therapy to deal with stress.
[On-screen text] “Consolidated Credit helped me get my debt under control and also helped us learn how to stop overspending and relying on credit.”
Why doesn’t DIY work for consolidating credit with a bad score?
There are two ways to consolidate credit card debt on your own. But both require that you apply for a new line of credit in order to consolidate. With a balance transfer credit card, you must open a new credit card account. If you take out a personal consolidation loan, you must qualify for the loan.
A bad credit score will lead to one of two outcomes:
- You get rejected for the loan or credit card outright.
- You qualify for rates and terms that don’t provide the benefit you need.
The second is more dangerous than the first. If you get rejected, you simply move on to credit counseling. However, in the latter case you must make a judgment call about whether the rate is low enough to benefit you. This can be tricky.
Comparing monthly and total cost
When choosing any debt relief solution, there are two costs that are critical to consider:
- Can you afford the monthly payments?
- What will be the total cost you incur to get out of debt?
Interest rates are directly tied to total cost. Higher interest charges mean your debt costs more to pay off. So, a higher rate means higher total costs. When the interest rates are too high, it means that you can’t pay back what you owe efficiently or effectively.
So, let’s say you can only qualify for 12% APR on a personal credit consolidation loan. Average credit card APR is around 15%, so in most cases that 3% decrease is not enough to positively impact repayment. In general, you need an interest rate of 10% or less for consolidation to be effective – the lower, the better.
Term (length of repayment plan) matters, too. For the most part, term is inversely tied to monthly payments.
- A longer term offers lower monthly payments, but increases total costs because there are more months to apply interest charges.
- A shorter term reduces your total cost, but it increases the monthly payment requirement.
Comparing DIY solutions to credit counseling
If you’re not sure if a personal loan is the right choice compared to a Debt Management Plan, assess the time and total costs.
- How fast can you get out of debt with a loan versus a debt management program?
- Is the total cost lower or higher?
- What’s the difference in monthly payments
For people that have good credit, they can often use a loan to effectively eliminate debt. They can qualify for a low interest rate and then set the term based on what payments they can afford.
However, if you have bad credit, it’s likely that the total cost of a loan will be higher than what you can achieve with debt management. In this case, you’re often better off if you go through credit counseling.
Elaine H. from Coral Springs, FL
The staff at the office I dealt with were professional, helpful and caring. They cared for me and my family and did everything in their power to properly guide me to Consolidate! Two years later, although my husband lost his job of 25 years, I still feel secure in knowing that my credit cards are closed and being paid off. Things are extremely tight right now, however, it would be so much worse if I didn't take the leap and consolidate my old debt. I would stroke out. People try to argue how consolidating ruins your credit. Adversely, it improved mine because nothing is ever late. Consolidated takes my funds directly out of my bank and sends the money to creditors. In two years, everything will be paid off!
Shanna S. from Palm Beach Gardens, FL
I was up to my eyeballs in debt my first year out of college and didn't know where to turn. I had multiple cards, including major credit cards, store cards, etc and they had high interest rates. I saw a commercial for Consolidated Credit and decided to call. The professional who took my call explained the plan in detail and how long it would take me to recover. He also gave me hope that life could still go on after the process and my credit would look even better! Well, its 3.5 years later and I have completed the process!!! I am so happy to be debt free and have learned a major lesson about budgeting, how to properly use a credit card and how to monitor my spending! Thank you Consolidated Credit!!!