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How to consolidate debt with bad credit

How to Consolidate Debt with Bad Credit

When you have bad credit, it can sometimes feel like your financial options are limited. Fortunately, there are things you can do to take control of your debt and improve your credit score. Below is a guide on how to consolidate debt with bad credit. Read it over to get a sense of the steps you can take toward becoming debt-free.

Why consolidate debt with a bad credit score

Taking out a new loan when you’re already in debt may not always seem like a good idea. For one, opening a new account can harm your credit score. For another, if you struggle with your spending habits, receiving a lump sum payment can tempt you to keep spending.

However, even if you have a less-than-perfect credit score, there are still quite a few reasons to consider consolidating your debt. At its core, consolidating debt can help you save money, particularly if you can get a debt consolidation loan with a lower interest rate. Plus, it may also make staying on top of your payments easier because it combines multiple debt payments into one.

How to use a loan to consolidate credit card debt with bad credit

Typically, when borrowers think about consolidating debt, the first step is to start looking at debt consolidation loans. A debt consolidation loan is simply a personal loan used to combine multiple debt payments into one. Unfortunately, when you have a lower credit score, getting one of these loans can be difficult. However, here are a few things you can do to increase your chances of being approved with that in mind.

Consider debt consolidation loans for bad credit

To start, there are debt consolidation loans that are aimed specifically at borrowers with bad credit. According to debt.org, you only need a credit score of at least 660 to qualify for this type of unsecured loan on your own. If your credit score is lower than that, you may want to look into some of the alternative options below.

If you decide to go this route, keep in mind that borrowing money with bad credit can be expensive. Often, these loans come with a higher interest rate than you might see elsewhere on the market.

Check your credit report for errors

When you have a low credit score, one of the first things you should do is check your credit report for any errors, such as incorrectly reported payments or miscalculated credit limits. If you do find an error, you can dispute it with the reporting credit bureau. Once the error is removed from your report, your score should receive a boost.

From now through April 2022, borrowers can check their credits reports with each of the three credit bureaus weekly. You can view your reports for free using AnnualCreditReport.com.

Apply with a co-signer

If there is someone you trust who has a more extensive credit history, consider asking them to be a co-signer on the loan. In this case, your co-signer’s credit score would be considered along with yours, which can help you to secure a better interest rate.

That said, keep in mind that a co-signer will share equal responsibility for the loan with you. Therefore, if you default on the loan or continually make late payments, your co-signer’s credit score may suffer along with your own.

Shop around for the best rate

Lastly, it’s especially important to shop around for the best rate when you have a bad credit score. As a rule of thumb, it’s a good idea to get quotes from at least three lenders before you decide where to apply.

Every lender has a different interest rate and fee structure, so it makes sense to compare a few different options to see which is the most affordable.

3 alternatives to using a debt consolidation loan

While debt consolidation loans can be a helpful resource for many people, they might not be the best choice for everyone. If it seems like a debt consolidation loan may not be the best option for you, keep reading. Below are a few alternative options that will help you take control of your debt without having to take out a new loan first.

Follow a debt payoff plan

Put simply, a debt payoff plan is a structured plan that individuals use to tackle their debt without getting professional help. The two most common methods are the debt snowball method and the debt avalanche method.

For its part, the debt snowball method involves paying off your smallest balances first, while the debt avalanche method pays off your highest-interest debt first. The theory behind the debt snowball method is that if you can experience a series of small wins at the beginning of your debt payoff journey, you will be more likely to continue. Meanwhile, the debt avalanche method aims to save you money over time by reducing the amount you’ll pay in interest charges.

Ask for a debt management plan

As the name suggests, a debt management plan is a structured path payoff plan that borrowers can work out directly with their creditors. This type of plan typically lumps multiple credit card debts into a single payment and allows the borrower three to five years to pay off the total balance.

It’s important to point out that asking your creditors for a debt management plan can negatively impact your credit. However, that impact is much less than filing for bankruptcy or undergoing a debt settlement.

Try to settle your debt

Settling your debt involves negotiating with your creditors and asking them to accept a lump-sum payment in exchange for stopping the collections process. Typically, you can save money because the amount negotiated for payment will be less than what you owe in total.

Settling your debt is often the best option if you’re in a position where you can no longer afford to make monthly payments. If you’re ready to finally leave your debt behind, reach out to Tayne Law group today at (866) 890-7337, or fill out our short contact form and we’ll get in touch!


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