Debt consolidation is a process that works well for many people who are struggling with debt payments. While it’s not unusual to have some debt, there are certain cases in which people have more payments than they can handle. Whether you struggle to pay your bills or just want to simplify your payment schedule, debt consolidation can help.
If you are interested in debt consolidation bad credit is something that may interfere, so you need to consider if this is the right decision for you. As this method is not a fix-all for debt issues, it’s important to carefully consider all angles before making a decision. This article will provide clarity on what this process is and what it’s not, as well as some ways to tell if it might work for you.
What is debt consolidation?
Simply put, debt consolidation combines multiple payments into one single one. It can also help to lower your interest rates, which allows you to pay off your debt faster.
There are three main ways a person can apply for this process. First, you can apply for a balance transfer card with a low or zero interest rate. Then transfer all your higher-interest card balances to this new card.
For this to work, you will need to qualify for a card with a higher limit than what you owe on your other cards combined. Additionally, you will also need to pay off the card’s balance within the promotional period before the APR rises (if applicable).
A second method people use is to get a debt consolidation loan. This can be done through a number of lenders, who will give you a lump sum of cash. The borrower then uses that money to pay off all his or her smaller loans, and repays the single loan with monthly payments.
Lastly, you can take out a loan on your own, use the money to pay your debt, then make a single payment to your loan. This is usually done by taking out a loan against home equity or a 401(k) loan, which has risks that need to be carefully considered.
How to Tell if Debt Consolidation Programs are Right for Me
To consolidate credit card debt sounds like a clear winner to most people. However, it is crucial that you carefully assess the situation and your options to decide if consolidation is the best course of action for yourself.
Debt consolidation may be a good option for you if your total debt (excluding mortgage) doesn’t exceed more than 40 percent of your income. If your debt is small enough, you may be able to pay it off on your own with a bit of dedication and careful budgeting.
Those who seek a loan for consolidation will also need to make sure they plan carefully for the new higher payment. You will need to ensure you have enough expected income to cover your new lump sum payment.
Additionally, whichever method you use to tackle your debt, it is vital that you come up with a detailed plan to avoid falling back into debt. This will help end a destructive cycle.
What to Look for in Debt Consolidation Programs
A debt consolidation loan, just like any other type of loan will require a hard check of your credit. This means it is important to do plenty of research before you start applying for programs.
Otherwise, you risk having multiple inquiries on your card, which will lower your credit. A lower credit score, of course, means that you will have a harder time getting accepted to a program.
There are several things applicants should look for when approaching debt management. Here is what you need to check when applying with debt consolidation companies:
- Online ratings. The first thing you should always check when considering whether or not to fill out an application is the online rating the company has received. A safe bet is to check the Better Business Bureau’s consolidation page. Here, you can read complaints from customers and review BBB ratings.
- Minimum requirements. Those who are applying for debt consolidation should carefully review any minimum requirements set forth by the lender before filling out an application.
- Interest rate. While you won’t know the exact interest rate until you apply for a consolidation program, you can often browse online forums and get a good idea. Additionally, many companies give an estimated range for their annual percentage rate (APR) before running a credit check.
- Origination fees. This is a fee charged by the company giving the loan that covers the processing and application. Fees are often based on a percentage of the total loan, such as a 2 percent origination fee. These can add up quickly, so make sure you review carefully.
- Minimum monthly payment. Of course, when you consolidate credit card debt, you will need to ensure you can meet at least the minimum monthly payment. Generally, a shorter loan lifespan will have a lower APR compared to a loan that stretches over many years.
- Late fees. Of course, the goal is always a full, on-time payment. However, it is still important to know how much you will be required to pay in late fees in the event a payment does go out late.
- Early payoff penalties. As lenders profit off the interest rate, some companies charge a penalty fee if you pay off the entirety of the loan earlier than scheduled. Before you agree to the terms of a loan, make sure you understand what, if anything, happens if you pay off the loan early.
Can I do debt consolidation with bad credit?
Generally, to be accepted into debt consolidation programs, you will need to have a good credit score. If you have a fair credit score that falls in between 580 to 660, you may have a shot at receiving a lower rate.
Meanwhile, if you do not have a good score you will likely not qualify for an interest rate that is significantly lower than the ones on your current credit cards. Those with a poor score will find it difficult to get approved for a consolidation, as they are seen as high-risk.
However, people who do not qualify for consolidation have other options. A debt management plan can be a good option, as it will pair you with a counselor who will help you come up with a plan, then negotiate on your behalf with creditors.