How To Consolidate Debt With Bad Credit and Take Control of Your Finances

What does consolidating debt with bad credit really mean? It works by combining all your debts into a single payment, making payments more manageable and potentially lowering your overall debt costs.

Bad credit is typically categorized by these FICO® credit score ranges:

• Poor: 300 to 579

• Fair: 580 to 669

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A lender has to trust that you'll pay back the money you borrow — and a low credit score can indicate that you're a risky borrower.

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Key Takeaways

• Consolidating debt with bad credit is possible — lenders that specialize in poor-to-fair credit, including credit unions and online lenders, can help combine multiple debts into a single monthly payment and may work with FICO® Scores below 580.

• A few proactive steps before applying can strengthen your application — reviewing your credit report for errors, documenting a stable income and adding a creditworthy co-signer all signal reliability to lenders.

• Multiple options exist beyond a traditional personal loan — a debt management plan (DMP) through a nonprofit credit counseling agency, a balance transfer card or a home equity loan may each fit different financial situations.

• Debt consolidation can improve your credit score over time — paying down high credit card balances lowers your credit utilization ratio, which is one factor scoring models use when calculating your score.

• A denial isn't the end of the road — try negotiating directly with your creditors, opening a secured credit card to rebuild your credit history or contacting a nonprofit credit counseling agency to explore a DMP.

Summary generated by AI, verified by MoneyLion editors

How To Qualify for a Debt Consolidation Loan With Bad Credit

Before you apply for a debt consolidation loan, check to see if there are any proactive steps you can take to improve your credit score.

• Dispute errors: Are there any errors on your credit report that you can dispute?

• Show recent on-time payments made: Can you use a tool like Experian Boost to show lenders that you faithfully pay your monthly rent and utilities?

• Verify your income: Can you prove you have a stable income?

If these aren't an option, consider:

Getting a Co-signer

You may consider applying with a co-signer who does have a stable income if this is your situation. Their income and respectable credit score may be enough to push your loan application through.

Finding a Lender for Poor to Fair Credit Scores

Again, some lenders specifically tout that they're bad-credit-friendly. Stick with these folks — it doesn't guarantee an approval, but your odds are infinitely higher than trying your hand at a bank that requires good-to-excellent credit.

Best Ways To Consolidate Debt With Bad Credit

Several lenders may be able to assist you with a debt consolidation loan. With poor credit, you can't be too choosy — but that doesn't mean you should neglect to compare rates. Shop around a bit to see all your available options.

Which Lenders Offer Debt Consolidation Loans for Bad Credit?

It's worth mentioning that, as someone with bad credit, you'll need to make the bank understand that you're a trustworthy person — despite what your credit score indicates. Your best bet may be with local credit unions, perhaps one that you've built a relationship with, to whom you can explain your new situation and flex your banking history.

If you'd rather go with a bank or online lender, here are a few to consider.

What if You Don't Qualify for a Debt Consolidation Loan?

If you can't seem to catch a break or find a co-signer to back your application, all's not lost. Here are your options:

Negotiate Your Debt

You may be able to negotiate your debt yourself by calling your creditors. This can result in reduced payments, lowered interest rates and even forgiveness of some of your debt.

Open a Secured Credit Card

You can also work to build credit by opening a secured credit card, which requires a refundable security deposit, to show banks that you're consistent with timely payments. If you've got multiple credit cards with balances, chip away at your current debt with strategies like the snowball or avalanche method.

Try a Nonprofit Credit Counseling Agency

For more extreme measures, consider working with a nonprofit credit counseling agency. They may help you start a debt management plan (DMP), which rolls all your debts into a single monthly payment. However, all credit cards included in your DMP will likely be closed.

Who Should Consider a Debt Consolidation Loan With Bad Credit — and Who Shouldn't

A debt consolidation loan might be right for you if:

• You have a steady income and can handle fixed monthly payments.

• Your credit score is low but improving, and you meet a lender's minimum, e.g., starting at 580.

• You're paying high interest rates on credit cards or payday loans.

• You want to simplify payments to a single due date each month.

• You're planning to avoid new debt and stick to a budget moving forward.

• You've tried budgeting or debt payoff strategies, but they're not working fast enough.

You may want to look at alternatives first if:

• You're behind on current payments and struggling to cover basic expenses.

• You don't qualify for a consolidation loan without very high interest rates.

• Your credit score is below 580, and lenders keep denying your applications.

• You're already dealing with collections or legal notices from creditors.

• You're unsure if you can commit to a new loan repayment plan.

• You haven't explored nonprofit credit counseling or hardship programs yet.

Consolidating Debt With Bad Credit FAQs

Can I consolidate my debt with bad credit?

You may be able to consolidate your debt with lenders that serve borrowers with bad credit. You may have to offer some type of collateral.

What are the best lenders for poor credit?

The best lenders for poor credit include Upstart and OneMain Financial.

How does consolidation affect your credit score?

Debt consolidation can positively affect your credit score in the long run. If you've got large balances on your credit cards, a loan to pay down those balances will lower your credit utilization, which can boost your credit score.

Can I consolidate credit card debt before applying for a mortgage?

Yes, you can consolidate debt before applying for a mortgage, but just note that when you open a new loan, your score may dip a bit. This is because lenders perform a hard credit inquiry on your credit before they approve you for a loan. A temporarily lower credit score may have negative effects on your mortgage rates.

What if I get denied a consolidation loan?

If you're denied a consolidation loan, you may need a co-signer to win approval. You may also need to call your lenders yourself to try to work out lower payments or reduced balances. Also, consider a debt management plan (DMP) if you're struggling to see the light at the end of the tunnel.

Key Terms

• Debt consolidation: The process of combining multiple debts — such as credit card balances or personal loans — into a single new payment, typically to simplify repayment or reduce overall interest costs.

• FICO® Score: A credit score model developed by Fair Isaac Corporation and used by 90% of top lenders to assess creditworthiness. Scores range from 300 to 850; scores below 580 are generally considered poor.

• Debt management plan (DMP): A structured repayment program organized by a nonprofit credit counseling agency. You make one monthly payment to the agency, which negotiates with creditors and distributes your payment to each, often at reduced interest rates or fees.

• Credit utilization: The percentage of your available revolving credit — such as credit card limits — that you're currently using. Lower utilization generally has a positive effect on your credit score.

• Co-signer: A person who agrees to share legal responsibility for a loan with the primary borrower. A co-signer with stronger credit or income can improve the odds of approval for applicants who don't qualify on their own.

• Hard inquiry: A review of your credit report that occurs when a lender evaluates your application for new credit. Hard inquiries can temporarily lower your credit score.

• Secured credit card: A credit card that requires a refundable cash deposit as collateral, which typically sets the credit limit. It's often used to build or rebuild credit.

Sources:

• CFPB: What Do I Need To Know About Consolidating My Credit Card Debt?

• CFPB: What Is Credit Counseling?

• myFICO: What Is a Credit Score?

• CFPB: Credit Report Key Terms

Summary generated by AI, verified by MoneyLion editors

Jasmin Baron, CCC™, contributed to editing this article. Photo Credit: fizkes | iStock.com