Consolidating credit card debt when you have bad credit is a tricky numbers game that requires some patience and diligence to succeed.
If your credit score is above 640, a debt consolidation loan (also known as a personal loan) should reduce the high interest rates charged by credit card companies.
If your credit score has gone south of 640, you can still consolidate your debt payments and lower your interest rates with a debt management plan from a nonprofit credit counseling agency. You may also qualify for debt relief through a home equity loan or line of credit, student loan consolidation from a bank, credit union or online lender described below.
When consolidating credit card debt, the name of the game is to get lower interest rates than those charged by your credit cards. If you have poor credit, have missed payments or just racked up a balance on a 29.99% APR credit card, there are options available to you to lower your rates.
The number of cards you have doesn’t matter to credit reporting bureaus nearly as much as the amount of debt you carry on those cards. The national average credit card debt for Americans carrying a balance was $4,293 in the summer of 2019.
The average interest rate for credit cards in December of 2019 was 17.33%. But many consumers, especially those with sub-prime and deep sub-prime credit scores, face interest rates of 29.99% or even higher.
Some banks, credit unions and a variety of on-line lending sites offer consolidation loans. As with any loan, the terms will largely depend on the applicant’s credit history. Most consumers think first of their credit score, but lenders also scrutinize your debt-to-income ratio.
Where Can I Get a Debt Consolidation Loan with Bad Credit?
Before you decide what sort of consolidation loan to seek, evaluate your options. It would be wise to call a nonprofit credit counseling agency to research debt consolidation programs, or you could do it on your own. Check your credit score by contacting one of the three credit rating agencies (Experian, Equifax, TransUnion) or using an online tool available through many banks and credit card companies.
Next, add up all your outstanding credit card debts to learn how much you need to repay. A consolidation loan will allow you to pay off your cards and focus on the new loan, which will have a lower interest rate and hopefully more lenient repayment terms.
If your credit score is high enough, you might be able get a consolidation loan from a bank or online lending company. If not, you’ll have to look for alternatives. Here are a few:
This alternative is a child of the internet. Individuals or groups will offer to finance your consolidation loan. Popular online lenders include Lending Club and Prosper. Online lenders require you to fill out an application and, based on your verified information, will offer you an interest rate for the loan. Acceptance isn’t guaranteed, and interest rates can range as high as 29%. If the loan application checks out and you like the terms, the service will pair you with a private lenders and the loan proceeds.
Consolidating Student Loans
Not all unsecured debt problems spring from credit cards. Student loan debt has soared to more than $1.5 trillion for the 44 million Americans that hold it. Unlike other unsecured debt, student loan debt isn’t dischargeable through bankruptcy, so you have just one choice: repay it. Lenders like non-dischargeable loans and offer borrowers lower rates, but sometimes former students can’t keep up with what they owe. Many students take out multiple loans during college and grad school, and they can have different repayment terms and interest rates. Consolidating to a single, fixed-rate loan can make managing your finances much easier. Remember, federal loans can be consolidated, but private student loans are not eligible.
There is an inherent flexibility with Peer-to-Peer lending that makes it one of the best places to go for people with bad credit seeking a debt consolidation loan. P2P lenders choose who they want to do business with and how much risk they are willing to take. Your credit score still matters – it will dictate how high an interest rate you pay on the loan – but it does not automatically eliminate you from consideration like it would at some commercial banks and credit unions.
Get a Friend or Relative to Co-sign
You might be able to find a relative or friend to co-sign a consolidation loan. This might be a good alternative for you if your credit score disqualifies you from a bank loan, but it puts the co-signer on the hook if you default. Co-signers should be wary when the agree to this arrangement and make sure all terms and conditions are spelled out in an agreement.
Low Minimum Score Lenders
Some lenders will offer consolidation loans to those with lower minimum credit scores. A score less than 640 typically disqualifies you from commercial bank loans, but some lenders will approve loans for borrowers with scores under 600. Keep in mind, that lending is about risk and the bigger risk you are, the more interest the lender will want you to pay.
Home Equity Loan
You might also consider wrapping your debts into a secured loan like a home equity loan. As long as you have collateral that a lender can seize if you default on your loan, the lender might offer financing. Often with collateral such as a home or a car, you can get a better interest rate than on an unsecured loan in a similar amount. But remember, secured loans come with an implicit risk: If you miss payments, the lender can seize the property you used to secure the loan.
Payday lenders charge extremely high interest rates on loans that are really just advances on your next paycheck. If you owe $300 on your credit card, a payday loan could give you the money right now. The downside: The interest on the payday loan will be much higher than the interest on the credit card. Even if the payday loan is enough to bring you current on several credit cards by effectively consolidating the debt, the new loan with the payday lender will yield worse financial consequences. Payday loans are not a good way to consolidate debt.
Watch Out for Predatory Lenders
If you decide that you absolutely must risk taking a payday loan, be aware that this is the home base for predatory lenders. The interest rates of $15 on every $100 loaned work out to 399% APR, as opposed to the 25%-35% charged on high interest credit cards. Also, if you can’t repay the loan in the typical time period of two weeks, you could get talked into “rolling over” the loan for another two weeks, which means more interest and fees for a loan you already can’t afford to repay. In short, using payday loans to try and get out of debt, actually can put you deeper in debt.
How Lenders Evaluate You: Debt-to-Income Ratio
To calculate your debt-to-income ratio add up all your monthly debt payments and divide that number by your gross monthly income. For example, let’s say you are paying $1,300 a month for your mortgage, $400 a month for a car and $500 a month in other debts, you have $2,200 in debt payments.
If your monthly pre-tax income is $5,000, you debt-to-income ratio would be 44% (monthly debt ($2,200) divided by gross income ($5,000) = 44%). That would be a problem for lenders, who typically get skittish when the debt-to-income number climbs above 35%.
How Your Credit Score Impacts Your Interest Rates
Lenders offer different interest rates, usually 5.99% to 32.99%, or other terms based on the risk that the borrower will not repay the loan. It’s known as “risk-based pricing,” and the bottom line is simple: The lower the risk, the better the interest rate terms.
Sometimes the “risk” is too great to qualify for a consolidation loan. For example, Prosper, an online lending company, requires a credit score of 640 or higher. Lending Tree, another online source requires a 660 or higher.
The average credit score is 703 in 2019, but 19% of consumers have scores lower than 600 and likely would be turned down for consolidation loan. It’s a catch-22, but there are alternatives, specifically a debt management program.
Debt Consolidation Loan Alternatives: Other Debt Relief Options
Unfortunately, trying to restructure your debt with a consolidation loan sometimes is impossible. Before you throw up your hands, you should call a nonprofit debt management company, whose counselors offer advice on suitable debt relief options.
The credit counselors specialize in helping consumers set up budgets and will ask questions about your income and expenses to help determine the right option for eliminating debt.
Here are some of the choices you may be presented:
- Debt management program – These are offered by nonprofit credit counseling agencies. This program reduces interest rates on credit cards to 8% (sometimes lower) and lowers your monthly payment to an affordable rate. The goal for credit counselors is to eliminate credit card debt in 3-5 years.
- Debt settlement program – This option requires negotiating with card companies to get them to accept less than what is owed on a debt. The goal is to have the card company accept 50% of what is owed. The drawback is this will put a stain on your credit report for seven years and you could have problems getting any other type of credit.
- Bankruptcy – If there is no way you can eliminate debt in five years or less through a repayment program, then filing for bankruptcy could be your best option. Your options are chapter 7 (dischargeable debt) or Chapter 13 (repayment plan), but both leave damaging marks on your credit report. are becomes the court of last resort. Before doing anything, contact an attorney who specializes in bankruptcy filings.
Bankruptcy always should be the court of last resort. If you have poor credit and are in an ocean of debt, a consolidation process is often the best way to keep from drowning.
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