Debt consolidation generally has two goals: to make it cheaper and easier to repay debts. When you put it like that, it’s only natural people dealing with multiple, high-interest debts would want to know more.
Two of the leading consolidation strategies involve transferring balances onto a new card with a low introductory APR or taking out a consolidation loan. Seeing as the average interest rates on credit cards are nearly 18 percent for new offers and 15 percent for existing accounts, many borrowers are eager to get a break on growing interest charges. Eliminating or reducing interest through consolidation can help you get a leg up on paying down credit card debt.
But there is a catch. Qualifying for the most competitive interest rates on consolidation loans or the best balance transfer offers often requires strong credit. However, this doesn’t necessarily mean borrowers with poor credit are automatically excluded. Many times, there are options out there for borrowers willing to do some research and comparison shopping.
Here’s how to meet the requirement for debt consolidation with bad credit.
Try to Optimize Your Credit
Anything you can do to improve your credit score will help. Building strong credit is a long-term process, but there are a few actions you can take in the short term to strengthen your consolidation loan or card application.
Here are some tips from Forbes on how to raise your credit score:
- Pay your bills on time to establish a solid credit history.
- Keep all current credit accounts open to keep your credit utilization rate low.
- Limit hard inquiries on your credit report by applying only for lines of credit you need and for which you’ll likely be approved.
- Look over your credit report and dispute any errors you find.
Compare a Variety Product Offerings
The next step is shopping around. Many banks and credit unions offer consolidation loans, but have pretty stringent credit score requirements. Many online lenders offer more flexible terms. As you shop around, keep track of the fees, interest rates and loan lengths for each product so you can narrow down your options.
If you get pre-qualified, you’ll be able to get an estimate on rates without having to actually apply — which, as we mentioned above, can trigger hard inquiries that ding your credit score.
Check Out Secured Loans
Most debt consolidation loans are unsecured, which means you won’t have to offer collateral to get one. However, borrowers with bad credit may find it easier to get approved for a secured loan in which they do offer up collateral — like their home or vehicle. Since lenders would be able to repossess this asset if you default, therefore lowering their risk, they are often more willing to approve secured loans than unsecured.
Of course, this means there’s the huge risk you’d lose your asset if you default on the consolidation loan. Only consider this option if you’re confident you can stay on top of monthly payments.
Look for a Cosigner
Do you have a friend, colleague or family member who would be willing to vouch for you? Adding a cosigner with strong credit to your loan can help you get approved. This is not a decision to take lightly, though, as the cosigner will be responsible for the loan in the case you default — and will feel the effects of late or missed payments on their credit history, too.
Again, only go this route if you’re confident you can make timely payments in full each month. Otherwise you risk burning a bridge in your personal life and jeopardizing your financial health even more.
It is absolutely possible to qualify for a debt consolidation loan with bad credit if you’re willing to shop online lenders, optimize your credit and consider some alternative strategies.