4 Tips for Consolidating Debt with a Low Credit Score

    Dealing with debt is a challenge no matter what your financial circumstances — but trying to get rid of debt with a low credit score can make the process even more complex. It’s somewhat of a catch 22: Getting rid of the debt will help you rebuild your credit, but it often feels next to impossible to do so because of the poor credit.

    On a positive note, there are debt relief strategies — like consolidation loans — workable for people with a wide range of credit scores. Here are four tips to keep in mind if you decide to go the route of consolidating your debts with low credit.

    Always Check Your Full Credit Report

    Keeping track of your credit score is a great start, but it’s important to check your full credit history before applying for loans. Anyone in the U.S. can get a free copy of their credit report every 12 months from each of the three major reporting bureaus — Equifax, Experian and TransUnion. 

    Your credit report will include important information about each of your credit accounts, plus any applications you’ve submitted for new lines of credit. Make sure everything listed on your report is completely accurate. Request corrections for any errors you find. Take note of where your credit stands and why, so you can work to improve it and apply for the consolidation loans you’re most likely to get. 

    Compare Banks, Credit Unions and Online Lenders

    There are several different types of lenders to consider when you’re seeking debt consolidation loans with bad credit. Banks, credit unions and online lenders offer loans with a wide range of terms — like varying interest rates, loan lengths, minimum credit scores, fees, etc.

    Although it may seem intuitive to apply for as many loans as possible to increase your chances of approval, this strategy is actually counterproductive. Each time you apply for a loan, the lender performs a “hard inquiry” on your credit report. These hard inquiries actually dent your credit score, so you’ll want to keep them to a minimum. Doing your research ahead of applying for a loan can help you maximize your chances of finding a good fit and receiving approval.

    Look Out for High Interest Rates

    Lenders are always trying to mitigate risk. So, they tend to charge people with lower credit scores more to borrow money, expressed as the annual percentage rate (APR). At some point the APR may even be so high on a loan you’d be better paying off your debts without it.

    Calculate how much you’ll pay on a given loan all things considered. Compare this number to how much you’d pay on your current debts without consolidating. It’s wise to move ahead with the loan only if you’ll be paying less. It does little good to take out a consolidation loan with a higher APR than what you’re currently paying on your unsecured debts.

    Consider a Secured Loan or Co-Signer

    There are a few additional ways to strengthen your loan application, namely securing it with an asset or adding a co-signer. The upside? Lenders will see you as less risky if you’re willing to tie assets or a co-signer with good credit to your application. The downside? You’ll put the secured asset or your co-signer at risk if you default on the loan. Make sure you can commit to repaying the loan in full, and on time for years to come — especially if you’re involving a co-signer or asset.

    It’s possible to consolidate debt with a low credit score, provided you do your research and avoid pitfalls like sky-high APR.