Debt consolidation is one of the most common debt relief options. In short, it is a method of taking out a new loan to pay off your various high-interest debts.
For many debtors, it offers a simple, straightforward way to lower monthly payments, reduce the number of creditors and accounts to manage, and shorten the debt payoff timeline.
Your FICO score is what lenders typically use to evaluate your creditworthiness when it comes to offering a debt consolidation loan. The score usually ranges from 300 and 850.
Generally speaking, scores of 670 or greater are deemed “good.” Scores between 580 and 670 are considered “fair.” And scores below 580 are generally described as “poor.”
It’s vital to know your credit score if you think you may want to take out a consolidation loan to manage your debts: if your credit score falls below 580, it may be hard for you to manage your debt through a consolidation loan.
This is because you are unlikely to find a lender who will offer a loan with favorable interest rates and payback timelines. In these cases, a debt consolidation loan may not be the best debt relief option for you.
Fortunately, though, there are still some ways you can consolidate your debt, even if your credit score is bad. Here are some common debt management options to which you can turn if you have bad credit.
Debt Consolidation Options for Bad Credit: Personal Loans
A personal loan will come in the form of a lump sum offering by some organization or individual other than a financial institution.
These loans may come with higher interest rates than typical debt consolidation loans, however, they may be the best debt relief option for borrowers with poor credit.
Some online lender options, like Experian partner Upstart, involve a vetting process for borrowers that considers factors other than credit history.
For instance, Upstart reviews data like employment history, income, and educational level to assess a potential borrower’s creditworthiness. Upstart offers loans up to $50,000 that borrowers can use to pay off credit cards and other high-interest debts.
The application processes are usually simple and taking out a loan like this will usually not affect a borrower’s credit score.
Alternatively, you can consider seeking a loan from a family member or friend involving terms that you both find favorable.
There are many caveats to this option, however: make sure you involve an attorney or financial advisor to ensure you put the proper safeguards in place to preserve not only your finances but also your relationship with that individual.
Alternative Debt Management Options for Bad Credit
Consolidating your debt may seem like the only way to lower your payments and to get out of debt. However, if you have bad credit, there are other debt relief options out there for you. Here are a few alternatives to debt consolidation loans that you may want to consider:
Debt Management Plans
Before applying for a loan, consider exploring different debt management plans that can help you get out of debt without accumulating more of it.
Most debt management plans involve working with a credit counselor who will help you construct a repayment plan, craft a budget, and create a timeline to pay off your debt.
Your credit counselor may also negotiate with your creditors to try to score a lower interest rate or monthly payment.
This option carries many benefits: Not only can a credit counselor help you navigate your debt repayment, but having a partner on your side can eliminate much of the stress and uncertainty that comes along with any financial overhaul.
Responsible Credit Card Usage
Devise a plan to ensure you don’t fall into even more debt while you are working to pay off your existing balances.
Consider finding an accountability partner to help you manage your credit card use, or try foregoing the use of your cards entirely until your existing debts are paid in full.
Creating – and following – a budget is a critical step in understanding how you got into debt in the first place. Once your budget is in place, you will be able to see the different sources to which your money goes each month, including how much is currently going into your debts.
You can use your budget to decide if you can pour more into your debts each month and if so when you can reasonably expect to have your loans paid in full.
This is generally deemed a last resort option. However, if you are overwhelmed and see no way of paying back your debts, consider contacting an attorney to determine whether you can find relief through the legal process of a bankruptcy filing.
Bankruptcy involves filing a petition with the court to ask for relief from overwhelming debts. Generally, this relief will come in one of two forms: liquidation under Chapter 7 of the Bankruptcy Code or a Chapter 13 payment plan.
In other words, you can petition the court to either allow for the liquidation of your property to pay off your debts (and, in many cases, discharge the bulk of them) or order your creditors to accept a repayment plan under different terms than those of the original agreement.
Keep in mind, however, that a bankruptcy filing will remain on your credit report for up to ten years, so it may hinder your ability to obtain loans in the future.
Reach out to a credit counselor or a reputable debt relief agency if you have further questions about how to manage debt with bad credit