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Debt Consolidation with Bad Credit: What You Need to Know

If you have a low credit score, debt consolidation will be tricky. But it can be done with the right approach.

Written by Hilary Collins / May 6, 2022

Quick Bites

  • Debt consolidation can simplify your payments and lower your interest rate if approached thoughtfully.
  • With a low credit score, it might be difficult to qualify for consolidation options that actually save you money.
  • Look at your consolidation options carefully and read the fine print to determine if the terms will help your financial situation.
  • You might want to take some time to repair your credit score before consolidating your debt to qualify for more attractive interest rates.

Is it possible to consolidate debt with a low credit score? The answer is: It depends. But maybe the better question is, even if it is possible, is it worth it?

True, debt consolidation can serve as an extremely helpful reset—in fact, 2019 research from TransUnion found that borrowers who consolidate their debt often see higher credit scores and long-term credit benefits.[1]

However, consolidating your debts without careful planning and research could set you further back and have negative ripple effects on other financial aspects of your life.

Here’s a look at what debt consolidation entails, why your credit score matters and what your options are when you have a low credit score.

Inside this article

  1. The basics of debt consolidation
  2. Why your credit score matters
  3. Debt consolidation options
  4. Is consolidation worth it?
  5. Your other options

The basics of debt consolidation

Debt consolidation is the process of taking out a larger loan to pay off all your smaller debts. For instance, if you have multiple credit cards, you could take out a debt consolidation loan and roll all of those credit cards into one large loan with one monthly payment and one interest rate.

Debt consolidation can greatly simplify your debt payments, but you have to be careful: Some debt consolidation loans will end up costing you more than just paying off your multiple original debts would have. When looking into debt consolidation, you have to take a look at the interest rates and payment schedules of all of your existing debt and compare them to the terms of a consolidation loan to see if it’s worth it.

This is where your credit score comes into play. If you have a low credit score, it becomes much less likely that you’ll be able to find a consolidation loan that offers favorable terms—that is, an interest rate and payment plan that actually save you money in the long run. 

How a low credit score impacts debt consolidation

Your credit score is essentially a score of how likely you are to pay your debts on time. There are three major credit reporting companies—Equifax, Experian and TransUnion. While how your score is calculated is a trade secret, knowing how your behavior can affect your score can help you get a higher score, and better rates if you consolidate your loans.

Your credit score is generally a number between 300 and 850. Some of the most important components that determine how high or low your credit score is include whether you pay your bills on time, how much of your credit limit you use, the number of credit accounts you have and how long you’ve had them.[2] If you regularly pay bills late, have maxed out credit cards and don’t have a long credit history, you might have a low credit score.

A low credit score means that banks, businesses and other lenders will see you as a risky borrower—someone who won’t pay their loan off on time, if at all. Because of that, the interest rates they offer will be much higher than those offered to someone with a high credit score whom they see as very likely to pay the loan off on schedule. Once your credit score dips below what the credit reporting companies classify as “fair,” it can become more difficult to take out a loan.

“Generally speaking, the threshold for fair credit is 580,” says Phyllis Cavallone-Jurek, executive director of Ladder Up, a Chicago-based nonprofit dedicated to improving financial literacy. “But sometimes even with a score below 680 you’ll see significantly different interest rates and terms offered.”

Taking a few months to repair your credit score can often make a big difference in the interest rate and other terms for debt consolidation. “Sometimes, it will make the most sense to wait until you can improve your credit score,” Cavallone-Jurek says. “I’ve seen people take a second job and dedicate all of their income from that job to paying down their debt and improving their credit. Once you repair your credit score, you can qualify for a better rate.”

Common debt consolidation options

You have several ways to consolidate your loans, including:

A loan from a bank or credit union

The most common consolidation method is a loan from a qualified lender like a bank or credit union. 

Carefully review the terms and compare them to the terms for your existing debts. How does the interest rate compare? What about the payment schedule? An online debt consolidation calculator, like the one from AARP, can help you determine if debt consolidation will actually save you money in the long run, not just on monthly payments.

For instance, say your existing debt payments are $800 a month, which you have to pay on a monthly basis for three years to pay off your debts. A consolidation loan might offer a monthly payment of $600, but with a six-year term—that means instead of $28,800, you’ll pay $43,200 over the life of the loan. This is why you really need to do your homework to ensure that consolidation is the right option for you.

Home equity loan or HELOC

If you’re a homeowner, a home equity loan is another option, but one that should be approached with caution. While putting your home up as collateral could gain you a lower interest rate, if unforeseen circumstances arise and you’re not able to pay back the loan, you could lose your home.

Tip: Payday loans are rarely a good idea as they often have predatory terms and in some states can charge up to 600% in interest, meaning you’re going to owe even more money.[3]

A home equity line of credit (HELOC) is also a popular option for debt consolidation. Similar to a home equity loan, you offer your home as collateral to lower your interest rate on a line of credit. This is not a flat amount like a loan, but a revolving debt like a credit card. But again, like a home equity loan, if you default on your HELOC or are unable to make payments, you could face foreclosure.

Balance transfer credit card

Another option is a no-interest credit card balance transfer. Be careful with this option, as the 0% interest rate is often for a limited time. Additionally, most credit cards will charge a fee, a certain percentage of the total debt, when you transfer the balance.

Personal loan

You might have a friend or family member who could either cosign on a loan with you or offer you a personal loan from their own savings. While this can be a great option, remember that failing to repay the money or live up to the terms of the agreement can sour relationships permanently. Before you take someone up on this offer, sit down and talk about your repayment plan.

“I always recommend writing down the agreement when you’re borrowing from or co-borrowing with a friend or relative,” Cavallone-Jurek advises. “It helps make the expectations clear for both sides.”

Is consolidation worth it?

In the internet era, it’s easier than ever to rate-shop—that is, apply to various lenders and see how their rates and terms compare. Remember to keep all of the drawbacks mentioned above in mind.

It can be tempting to lower your monthly payments or to streamline all of your debts into one place, but be sure to consider the options and how much you’ll be paying in the long run. Debt consolidation done wrong can cost you thousands of dollars and years in payments.

Your other options

Cavallone-Jurek notes that there are nonprofit organizations that work with borrowers who are overwhelmed with debt but with few options for simplifying or consolidating it. The National Foundation for Credit Counseling, the largest and longest-serving U.S. nonprofit financial counseling organization, offers an online form that can connect you with a reputable agency.

The Consumer Financial Protection Bureau also recommends reaching out to your current lenders to see if they would be willing to lower your monthly payments, reduce the interest they’re charging you or waive fees.[4] After all, they might be willing to work with you to make it possible for you to pay back the money you owe.

If streamlining or simplifying payments is your main concern, you can often change the due date on your payments and automate the process to take the guesswork out of the process. Automating payments also makes it less likely that you’ll miss a payment, which can help boost your credit score.

Even in the best of circumstances, navigating multiple debts is challenging and ends up siphoning portions of your income away from things you’d rather spend it on. But jumping into debt consolidation without making sure it’s the right choice for your specific situation can just prolong the time you spend making the payments and multiply the amount you pay in the end. Do your research and consult with an expert to make a wise financial decision that puts you ahead both now and in the long term.

Article Sources
  1. “Debt Consolidation and Its Impact,” TransUnion, https://content.transunion.com/v/debt-consolidation-final?_ga=2.59136045.1070683886.1651347727-1581896664.1651347727.
  2. “Understand Your Credit Score,” Consumer Financial Protection Bureau, https://files.consumerfinance.gov/f/documents/cfpb_adult-fin-ed_understand-your-credit-score.pdf.
  3. “Dangers of Payday Loans and Some Alternatives,” National Foundation for Credit Counseling, https://www.nfcc.org/resources/blog/dangers-of-payday-loans-and-some-alternatives.
  4. “What Do I Need to Know If I’m Thinking about Consolidating My Credit Card Debt?” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-know-if-im-thinking-about-consolidating-my-credit-card-debt-en-1861.

About the Author

Hilary Collins

Hilary Collins

Hilary is an experienced finance writer with a passion for turning complicated topics into readable stories with real-world takeaways.

Full bio

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