Consolidating your debt can be a way to simplify your personal finances. Some people are able to use consolidation loans to pay down debt faster. But if you have bad debt, you might wonder if you’ll be able to consolidate your debt. Find out about the pros and cons of consolidating debt with bad credit below and then discover some options for doing so.
The Benefits of Consolidating Your Debt with Bad Credit
Whether you have bad credit or not, consolidating your debt can have some benefits. One of the most common pros of consolidating debt is that you can combine multiple payments into one.
It’s easier to manage and remember to pay one payment biweekly or monthly. That can help you stay current on your debt. If you work with a consolidation loan lender that reports to all three of the credit bureaus, it can even help you make a positive impact on your credit history and score.
Another potential benefit of a consolidation loan is that it may make your debt more affordable every month. You may be able to combine several high-interest or high-payment loans or credit card balances in a single loan with a lower monthly payment. That can help you budget better, making it more likely that you can make those important on-time payments.
Potential Disadvantages of Consolidating Debt with Bad Credit
But there are some potential downsides to consolidating debt, especially if you have bad credit.
The first potential disadvantage of credit consolidation is the possibility that you might double-dip. This is true for anyone, not just someone with bad credit.
If you use a consolidation loan to pay off credit card balances, you might still have the credit card. That makes it possible to use the credit card again, running your credit limit back up at the same time that you have this debt consolidation loan you’re paying on. This leaves you with two debts and possibly doubles the debt load you started with.
It’s important when you’re taking out a debt consolidation loan to avoid running up your credit again. In some cases, you may want to close other accounts to take away the temptation. That can have some temporary negative impact on your credit score, but it may be better than running up debt you could struggle to pay back.
Another potential disadvantage of a credit consolidation loan specifically for someone with bad credit has to do with interest rates. If you had fair or good credit at one point and have bad credit now, the interest rate on your consolidation loan might be more than the interest on your current debt.
Do the math before you apply for and accept a loan. Find out how much the debt will cost you long-term if you consolidate it versus how much it would cost if you didn’t. You may also want to look at the cost of the debt monthly in both situations. If you’re in a financial bind and need to lower your monthly payments, you may be willing to take on a higher interest rate if the new loan makes it easier to make the monthly payments.
Ways to Consolidate Debt Even if You Have Bad Credit
Consolidating your debt with bad credit isn’t impossible. Here are a few options to consider.
1. Consolidating With an Existing Balance Transfer Card
If you already have a couple of credit cards, your bad credit won’t necessarily keep you from putting them to use. If one of those cards is a balance transfer card with plenty of credit limit left, you may be able to move debt from other cards onto it. That lets you deal with a single account and make one payment every month.
Here’s where will power is a big deal, though. It could be tempting to run up the balance on the cards you cleared. But what you don’t need, especially with poor credit, is double the credit card debt. How much of your open credit you’ve used is actually a major factor in determining your credit score, so this could drive your score down further.
2. Using a Secured Loan or Line of Credit
If you have the right resources, you might be able to get a secured loan or line of credit to consolidate your debt. One of the most common ways of doing this is with equity in your home.
Lenders are more likely to approve a secured loan for someone with bad credit than an unsecured one. That’s because the surety reduces the risk for the lender. If you take out a home equity loan to consolidate your debt and then you fail to pay that loan back, for example, the lender can come after your home. The value in your home helps to ensure that they get their money back whether you pay or not.
You might have spotted the increased risk for you as the borrower, though. If for any reason you’re unable to pay the loan back, your home is now at risk. That’s the downside with using a secured loan to consolidate debt.
3. Taking out a Personal Loan
A third option for someone with bad credit who wants to consolidate debt might be a personal loan. Personal loans are installment loans that you can use for whatever you want or need, often including paying off other debts.
The way this works is that you take out the personal loan and use the funds to pay off other debts. Then instead of multiple debts, you only have to deal with the one loan.
If you have bad credit and you’re looking for this type of loan, look for lenders who say they work with people with less-than-good credit. You may also want to find out whether you can use the loan for anything, as not all lenders support debt consolidation loans.
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