Do you think you can successfully implement debt consolidation if you have a bad credit rating? The answer to that is yes! You can consolidate debt every if you have a bad credit score. However, you need to know what your options are so you can choose the right one wisely.
But how many people have a bad credit score? According to statistics, more than 30% of consumers have a credit score of 620 and lower in 2014. The majority still have a good score of 680 and more. But having more than a third with a bad credit score is still cause for concern.
If you have a bad credit rating, how can you improve it? Well, being in debt places you in the perfect situation to improve it. A good credit score means you are good at paying off what you owe. The challenge is in making sure that you pay off your debts properly. Fortunately for you, there are a lot of debt solutions that you can use to assist you in paying off what you owe. However, if you have a bad credit rating, what exactly are your options?
Debt consolidation alternatives for bad credit rating
According to reports, 8 out f 10 Americans are determined to focus on debt reduction. Some experts are alarmed because consumers are so focused on it that they are putting other equally important financial goals in the backseat like retirement savings.
While it is their choice to make, this mindset just increases the importance of choosing the right debt solution. You want to make sure that you choose correctly so you will not waste both time and money as you try to get out of debt.
Unfortunately, since you have a bad credit rating, your choices will be somewhat limited. However, they are still effective as long as you understand how to use the debt solution correctly.
The key to finding the right debt solution is to understand both your current financial situation and the debt relief options that you have. You want to align the debt solution with your financial position because that will increase the chances of your monthly payments being affordable.
Here are the two options that you have to get out of debt with a bad credit rating.
Debt management involves the help of a credit counselor. They will take a look at your debt and financial situation so they can create a customized debt repayment program for you. This is called the Debt Management Plan. This plan takes all your debts and the counselors will come up with a reasonable monthly payment for each account. The amount you can afford to pay each month will determine how long the repayment will take. The consultation is usually free since most credit counselors work with non-profit organizations. But if you want to pursue the Debt Management Plan, you may have to pay a minimal monthly fee.
When you enroll in a debt management program, the credit counselor will take the plan and present it to your different creditors and lenders for approval. Once approved, you will then send one payment to the credit counselor – a sum of all the monthly debt that you have to pay based on the debt management plan. They will take charge of distributing the funds to your different creditors and lenders. Since you only have one payment to worry about each month, it takes less effort to monitor your debts. It will lead to less stress. That should make it easier for you to focus on growing your income so you can afford all your debt payments.
Home equity loan
Another option to consolidate debt despite a bad credit rating is to borrow a home equity loan. This is when you take the equity that you have in your house and borrow a loan against it. So if your equity is $100,000, you can use a portion of that loan to pay off your multiple debts. Since you borrowed using your home equity, that makes it a secured loan. This will give you a low-interest rate. This will save you a lot of money especially if you are consolidating credit card debts.
Of course, you need to exert caution when you are using your home in debt consolidation. You have to make sure that you have an effective debt repayment plan in place. If you fail to pay off the home equity loan, you can end up losing your house in the process.
Tips when you have a bad credit rating while consolidating
You have to remember that having a debt solution will not solve your bad credit standing immediately. The improvement of your credit score will depend on how you pay it back. It is not something that you can accomplish overnight. It requires consistent effort and diligent debt relief effort on your part.
If you really want to succeed at repairing your credit score while in the midst of a debt consolidation program, here are three tips that can help.
Do not be late
Late payments have a huge influence on your credit score. If you want to improve your bad credit rating, you should never allow yourself to be late even for one payment. Set up reminders that will tell you if a due date is coming up. That way, you will never miss out on a payment. The more on-time payments you make, the more your credit rating will improve.
Stop borrowing money
You should also make a commitment to stop borrowing money. Do not worry because this is only temporary. You just have to bring your total debt balance down. Part of your credit rating looks at your credit utilization rate. That is the comparison between your balance the limit. The closer your balance is to your limit, the lower your credit score will be. This is why you need to lower your balance to 30% of your limit. If you are still paying off your consolidated debt, stay away from more debt. Do not add to your balance until after you have paid it all off. At the very least, you should go below the 30% mark. Every time you are in danger of borrowing 30% of your limit, stop borrowing money. This will ensure that you will never have to feel like you are drowning in debt.
Monitor your budget
Finally, you should also monitor your budget while you are paying off your consolidated debts. This will ensure that your payments will always be funded. Put your debt payments on top of the priority list. In case there is a need to cut back on some expenses, you should never include it in what you will remove. By monitoring your budget, you can be conscious of how much you are spending each month. Scrutinize your expenses and see if there are items there that can be removed. Maybe there are things that you can save on. If you can increase your monthly debt payments, you can achieve debt freedom a lot faster.