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If your FICO® credit score is below 580, managing your finances with debt consolidation might be difficult. But if you have "fair" or better credit and can get approved for a debt consolidation loan, it can be an easy way to lower your monthly payments, reduce the number of creditors you owe and shorten the time it takes to pay off your debt.
Debt consolidation is a method of taking out a new loan to pay off the high-interest debt in an effort to streamline monthly payments and save money over time. People typically use personal loans, low-interest credit card balance transfers, or debt management plans to consolidate their debt.
Consolidating Debt with Bad or Average Credit
The FICO® Score*, which ranges between 300 and 850, is the most commonly-used credit scoring model by lenders for evaluating a borrower's creditworthiness and has several ranges. Credit scores above 670 are considered good, very good or exceptional depending on the score. A "fair" score ranges from 580 to 669 and any score that is lower than 579 is considered "poor." Knowing your credit score is important in determining your options, but even with less than perfect credit, there are still ways you can consolidate your debt.
Debt Consolidation with a Personal Loan
While there are debt consolidation options available for people with "poor" scores, they often come with high-interest rates that may be higher than the rates of your current loans.
A good option would be to look at online lenders like Upstart—which is an Experian personal loan partner. Upstart looks at alternative data, beyond credit reports and scores, to determine whether a person qualifies for a loan. Factors like job history, income and education influence whether a candidate qualifies for a loan and a lower rate.
APR: 6.00 - 29.99% depending on the financial profile
Term: 36, 60 months
Upstart offers loans of up to $50,000 that can be used to pay off credit cards and consolidate other types of debt. Upstart has an easy application process and taking out a loan will not affect applicants' credit scores.
What Are the Benefits of a Debt Consolidation Loan?
One of the main advantages of a debt consolidation loan is eliminating the task of paying multiple lenders each month. When you consolidate all your existing debt into one new loan, you only have to make payments to your new lender. Making only one payment is not only easier, but it can save you from dealing with late and missed payments—which can occur when juggling multiple different payments each month.
Payment history is the most important factor in calculating your credit score—accounting for 35% of your FICO® Score—and it is important to avoid paying any loan payments past their due date. Late payments can easily occur when someone has multiple loan payments each month and is not using auto pay. Another advantage of a debt consolidation loan is lowering the amount of interest you're paying on your outstanding debt. People typically use debt consolidation loans to pay off their high-interest debt—like credit card debt, which can have interest rates that range from 18-25%. In most cases, a debt consolidation loan will have a much lower interest rate depending on your creditworthiness, saving you money on interest over the life of your loan.
Imagine you had $5,000 worth of credit card debt with an APR of about 25%. Over 36 months, the monthly payment on the debt would be approximately $240 and you would pay a total of $2,500 in total interest. If you were to consolidate this debt into a new loan with an average APR of 17% over 36 months, the total amount you pay toward interest would drop to around $1,700 and your monthly payment would come down to $200. In this scenario, the lower the APR on your new loan, the less you will pay toward interest over time.
How Do I Qualify for a Debt Consolidation Loan
Depending on your credit range, taking out a debt consolidation loan might not be the best idea. If you have a "poor" credit score, it may be difficult to get approved for a debt consolidation loan. Lenders often see people in "poor" credit ranges as risky, and as a result, might not issue a new loan to someone in that range.
Another potential issue with getting a debt consolidation loan with a "poor" credit score is that the interest rate on your new loan could, in some cases, be higher than the APR on your existing debt. Lenders often use your creditworthiness to establish what interest rate you get, so people with "poor" or even "fair" credit scores should be careful not take on new loans with higher rates.
Debt Consolidation Loan Options for Military Members
Members of the military can sometimes have more difficulty obtaining new credit from conventional lenders. Spending extended periods away from home without the need to take loans and utilize lines of revolving credit, members of the military can often have a less robust credit history.
As a result, there are specialized private lenders that service members of the military exclusively. Through these lending institutions, members of the military can apply for auto loans, mortgages and even personal loans that can be used for debt consolidation.
Obtaining a personal loan from a military lender is one option for military members trying to consolidate their existing debt. Military lenders will consider applicants with a lower score, but may still find people with a severely compromised credit history risky.
APR: 11.99 - 35.95% APRs compliant with the Military Lending Act
Term: 36, 48 months
Pioneer Services is a military lender that only works with current and ex-members of the military. They offer loans to military applicants with bad credit and use records other than credit reports and score to evaluate creditworthiness.
Alternatives to Debt Consolidation
While consolidating your debt may seem like the best way to lower your monthly payments or eliminate the hassle of paying multiple bills each month, for some people other debt management tactics might be a better option.
Debt Management Plans
Before you consider applying for a loan, one option is to use a debt management plan to consolidate your monthly debt payments. With a plan like this, you must first find a credit counselor and work with them to formulate and stick to a repayment plan. Once you and your counselor agree on a plan, they will often try to negotiate with your creditors to see if they can get you a lower monthly payment and sometimes a lower interest rate.
In this scenario, once the counselor has finished negotiating, you will pay their organization directly each month and they will make all of your monthly debt payments for you.
A debt management plan may be a good alternative for people with "poor" credit scores who may not be approved for a debt consolidation loan.
Credit Card Usage
Responsible credit card usage can help make sure that you don't rack up too much debt and don't get behind on payments. Knowing how to pay down credit card debt can be extremely helpful and can help you save money over time.
Creating a Budget
Creating a budget and monitoring your expenses is a vital step in understanding how much you can afford to pay toward existing debt each month. Once a budget is in place, you will be able to set aside a set amount toward your debt payments and inch toward your goal of paying your loans off.
If you are overwhelmed with debt and see no way of paying it off, bankruptcy may help you find relief. Filing for bankruptcy, however, will remain on your credit file for seven to 10 years and may affect your ability to obtain other loans in the future.
If you think debt consolidation might help you, but you are unsure what your credit score is, Experian's CreditMatchTM tool can help you find a personalized loan based your FICO® Score.
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The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
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Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on November 27, 2018, and has been updated.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.