When you have a bad credit score, it may seem as though your options are limited. You may have higher interest rates, as well as low credit limits on your credit cards or loans. As a result, you may have multiple lines of credit open and struggle to pay all your bills on time. However, living with bad credit is not the end of the world. In fact, when done properly, debt consolidation may actually help improve your credit score.
What is Debt Consolidation?
Put simply, debt consolidation combines most, if not all, of your unsecured debt into one single monthly payment. You are essentially paying your old loans with a new one. You may do this by taking out a consolidation loan with a lower interest rate and paying off all your other debts with this money. To be on the safe side, consider seeking an approved credit counseling agency, such as American Consumer Credit Counseling, to help you consolidate your debt without taking out a new loan. Credit counseling agencies work by negotiating with lenders to lower your interest rates on existing debt so that you only have one monthly payment.
Problems with Bad Credit
There are a few issues that exist when consolidating your debt with a bad credit rating:
- Credit card consolidation loans, sometimes referred to as payday loans, can come with very high interest rates and unsuitable terms and conditions. This is because unsecured debt is not backed by collateral, therefore the lender has no recourse to repossess your assets in case you default on your loan, except for collections and wage garnishments. If you take this route, make sure your consolidation loan has a lower interest rate than your existing credit card debt.
- When taking out a consolidation loan, you may run the risk of using the credit cards you pay off again. This is because once you repay the debt on the cards, they will return to a (very tempting) zero balance. This is very common, and will leave you with more debt than you had at the start.
- Homeowners may consider taking out a home equity loan, which typically has a lower interest rate than credit cards. However, if the home equity loan isn’t paid on time, you may potentially risk foreclosure on your home.
Consolidating Loans & Credit
Do you know your credit score? You should always check your credit rating, which is updated every 30 days by the credit bureaus. This is especially true if you’re considering debt consolidation with bad credit. Get a free, safe credit score report from AnnualCreditReport.com. Financial literacy is a huge part of improving your score. Regardless of whether or not you consolidate your debt, you should increase your score by always making payments on time and in full. That way, the better your credit, the better rates you’ll get from lenders.