Consolidating debt is possible even if you have a bad credit score. It is not the ideal situation, but it is possible.
Debt consolidation loans can be the perfect solution if you have a good credit score. When you have a high credit score, that is an indication that you are responsible when it comes to your debts. Because of that, the creditor will give you a lower interest rate on what you borrowed. It will lead to a lot of savings when it comes to your overall debt payments.
If you have a bad credit score, that is an indication that you were irresponsible with what you borrowed in the past. You either did not pay your dues in time or you do not meet the minimum payment requirement. This is bad news for creditors and lenders. They will be putting their business in danger because there is a high possibility that you will not pay your dues. This will lead them to give you a higher interest rate than the average.
In our society, the use of credit is the norm. In fact, statistics reveal that 3 out of 4 adults own a credit card. Some even own two or more. With easy access to credit, it is very easy to abuse it and lead to a bad credit score.
When the time comes for consolidating debt, how can you do it with a bad credit score?
Use your home equity when consolidating debt
Well if you own your house, that can be the answer to your problems. Even if you have a bad credit score at the moment, you can still consolidate your multiple debts by using the equity that you have accumulated on your home.
According to statistics, homeowners have more equity in their homes compared to previous years. With the rising home prices, the equity of properties rises with it. That means there is more to use when you want to pay off your debts. You can actually use between 80% to 90% of your home equity to help in consolidating debt.
But what are the different ways you can use the equity of your home to consolidate your multiple credit accounts?
Home equity line of credit
This is like having a credit card that is tied to the equity of your house. What is great about this option is that during the first few years or “draw” period, you are only required to pay for the monthly interest. Since it is secured by your home, you can expect a lower interest rate on it despite your bad credit score. If you decide to use this, make sure that you take note of when the “draw” period ends. Whatever amount you used will have to be paid off.
Another popular way of using your home equity in consolidating debt is to cash it out. This means you will refinance your mortgage into a new loan. You will owe a lot on your mortgage once more but you are free to use the cash as you wish – like consolidating debt. Again, since the loan is tied to your home, you can enjoy a lower interest rate even if you have a not so stellar credit score.
The last option that you can use is to get a second mortgage that is separate from the original one that you owe. It is usually limited to the value of your equity. The truth is, this is the least ideal of all the options because it has a higher interest than your primary mortgage. And with a bad credit score, you can expect that it will even be higher. But if you cannot access the first two, this can be an option for you to try out.
Reminders when using home equity to consolidate debt
While consolidating debt using your home equity will help you get a lower rate despite a bad credit score, you still need to be careful with it. Remember that you are putting your house on the line. What should have been an asset will become a liability once more. You have to approach this with a plan in mind.
You have to compare the terms of the loan and the interest rates. You should also consider the monthly payments. Make sure you can afford the payments without putting too much strain on your finances.
There are two important things that you need to remember if you will use this to consolidate your multiple debts.
This does not solve your debts
Like all debt consolidation options, this will not solve your debts. You have to keep in mind that you just shifted your debts around. You still have to pay it off. Do not for one minute think that the financial mess you are in is over. You just organized it a bit but you still have to sweep it off the floor and throw it away. Make sure you have a solid repayment plan in place so you can really get rid of that debt.
It is also important that you keep yourself from borrowing more money. At least, until after you have paid a significant amount of the debt you currently owe.
You are in danger of losing your home
We mentioned that using the equity of your home means you will be putting it on the line. Instead of owning a part of your house, you are giving it to the lender once more. If you fail to pay it off, you are doing more than just destroying your credit score. You are also going to lose your home. So make sure you stick to the plan of paying off your loan. Once you have paid off this debt, you will not just enjoy freedom from debt. You will also have a higher net worth because of the growing equity of your home.