As a whole, consumers in the United States have seen their FICO scores improving over the past few years. But 12 percent of the population still has a score under 550. Being in debt while also having bad credit is a tough combination. Fortunately, there are things that can be done about it, including debt consolidation with bad credit.
Talk with a Credit Counselor
For pretty much everyone dealing with debt, talking with a credit counselor is a great starting point. Many of these are non-profit organizations that exist to help consumers find their way out of debt.
One of the best aspects of credit counseling is you don’t have to pay anything for many of their services. You can talk to someone on the phone and get a free consultation, which typically involves combing through your finances and laying out some of the options available to you.
Here are some of the other things you can get from credit counseling:
- Budgeting advice
- Educational materials
- Referrals or recommendations to other programs
- Debt management plans
This final bullet point is an important one. Many people don’t know what it actually means to be enrolled in a debt management plan (DMP), so let’s look into what they are, and how they can help you get out of debt.
Debt Management Plans
DMPs are commonly structured as a kind of debt consolidation. When you consolidate your loans, you’re just taking a variety of unsecured accounts and bundling them into one. DMPs are a great option for this for a couple reasons.
Enrolling in a DMP means you’re going to get some guidance about dealing with your debt. It can be overwhelming to tackle it all on your own—especially if you have bad credit. Whether you work with a credit counselor or a debt relief agency, DMPs can be lifesavers.
The agency communicates your situation with your lenders, and they come to a consensus on what makes sense for a revised payment structure. While not all lenders are going to agree, many would rather get paid this way as opposed to through settlement or bankruptcy, where they’ll likely get much less.
Once the plan has been put together, you no longer need to worry about paying all your individual accounts. Instead, you send money to the credit counseling or debt relief agency and they pay your creditors. Ideally, this will lower your interest rates and simplify the repayment process since you’ll only have to worry about one account.
Debt Consolidation Loan
It’s also possible to get a top debt consolidation loan for bad credit from a firm like Bills.com. This is slightly different than a DMP, though they operate on similar principles. While a DMP often functions like a loan, it’s not necessarily one. There are also loans designed with debt consolidation in mind, even for people with bad credit.
While this sounds great in practice, it’s wise to take a good look at the specifics before you sign up for anything. Sometimes debt consolidation loans can lead to you ending up with a higher net interest rate than before. This means having to pay more over the long run. And if you don’t pay, you can end up in an even worse financial position. Make sure you understand the terms of the consolidated loan before committing to it.
Credit Card Balance Transfers
Credit card balance transfers are another type of debt consolidation. People who qualify for a credit card balance transfer can move their various credit card accounts onto a new one that comes with a low introductory interest rate. This can give you time to pay down your debt without accumulating new interest.
It’s important to note, however, your debt will almost certainly get worse if you don’t make progress during that introductory period. One of the disadvantages of a balance transfer is you’re typically doing this on your own, which can be intimidating for those with little-to-no financial expertise. You’ll also have to pay a transfer fee when doing this, typically around three to five percent of the transferred balance. Make sure you run the numbers and have a plan in place before attempting a credit card balance transfer.
Consolidating your debt is one way to potentially improve your finances. While it can be more difficult with bad credit, there are still options available to you. Make sure you understand what you’re signing up for before making any commitments though.