7 ways you can consolidate your debt if you have bad credit
There are many different options for consolidating credit, even if you have a poor or thin credit history. You may want to consider a:
- debt consolidation loan
- secured loan
- unsecured loan
- credit builder card
- guarantor loan
- credit union
- loan from family or friends
In order to make the best financial decision, you should work out which of these options you’re eligible for and research which one is best for your personal circumstances.
1. Bad credit debt consolidation loan
One option is to take out a loan for the amount that covers your debt and pay your debt back early. You’ll then have just the one loan to pay off. You’ll need to doublecheck with your current lenders if you will incur any early repayment charges for doing so.
There are two different types of debt consolidation loan available: secured and unsecured.
2. Secured loan
It’s normally easier to get a secured loan than an unsecured one because secured lenders use assets (such as your house) as collateral. This gives them more comfort to lend to you as there’s less risk involved from their point of view.
If you’re struggling to get an unsecured loan this might be the way forward, especially because you might be able to access better interest rates compared to an unsecured loan.
Be aware that if you fall behind on repayments, the lender could repossess your property in order to claw back funds – however this is usually a last resort.
3. Unsecured loan
With an unsecured loan there’s no collateral involved, so you don’t have to worry about losing your property if you can’t meet the repayments. However, you might find that you're offered higher interest rates than with a secured loan, making the cost of borrowing more expensive.
4. ‘Bad credit’ credit card
‘Bad credit’ credit cards are designed for people with a thin or poor credit history. You can use a credit card to transfer the balance of your other credit card debts over, so that you only have one monthly repayment.
Some balance transfer cards come with an introductory offer of 0% for a certain period – though these are usually for those with a high credit score. Providing you clear the full balance on the card within the introductory period, you won’t have to pay any interest - you’ll pay back what you owe and nothing more.
However, if you don’t pay off the full balance during this time period, you’ll end up paying interest on the remaining balance. Many credit cards also charge a fee for balance transfers, so make sure you research the costs thoroughly before applying.
5. Guarantor loan
If you’re struggling to get accepted for a regular loan, you might want to try getting a guarantor loan instead. A guarantor formally agrees to take over repayments if a borrower is no longer able (or willing) to make them. You may find it easier to get accepted for this type of loan if you have a guarantor with a good credit score.
Since being a guarantor is a legally binding agreement, you can’t get out of it once the contract has been signed and any money paid. Make sure you and your guarantor fully understand the risks involved for both of you. For example, if you fall behind on repayments, this will impact their credit score as well as your own.
6. Credit union
Credit unions are non-profit institutions ran by their members. Money is deposited by members and is available for the other members to borrow. You could consider joining a credit union and applying for a loan if you’re struggling to get accepted elsewhere.
It might still be difficult for you to join a credit union because they usually require you to have a common bond. For example, you might need to share the same profession or live in the same neighbourhood. You can find out if you’re eligible for one via The Association of British Credit Unions Limited.
7. A loan from family or friends
You could consider asking family or friends for a loan to consolidate your debt. They could offer you an interest-free loan, but remember you’ll be tied to a repayment plan if the loan is legally binding. If you stop making your repayments, you could damage your relationship with them irreparably. So you need to bear this in mind and make sure you can come to an arrangement that suits both parties.
What do lenders look for?
Lenders all use different criteria so their evaluations of your credit score will differ from one to the next. However, there are some common criteria they all tend to use, including your:
- credit history
- credit score
- income and outgoings
- address history
- credit utilisation ratio
Credit history and credit score
Financial companies look at your credit history and credit score to see how much of a risk they think it will be to lend to you, based on how well you’ve managed your money in the past.
Income and outgoings
They’ll use your credit history to examine your income and outgoings to see whether they think you can afford the repayments – on top of your existing bills.
If you’ve moved around a lot they might be more worried about lending to you. This is because you could be harder to contact if you don’t have a fixed permanent address.
Credit utilisation ratio
Your credit utilisation ratio represents the percentage of available credit to you that you use. The lower this number is, the more lenders will see that you can manage credit responsibly.
This means that they’ll be more likely to lend to you if your credit utilisation is low – ideally it should be 30% or under. So, this means spending 30% (or less) of your credit limit in total - across all of your credit cards and overdrafts.
Will I need a guarantor to get a debt consolidation loan?
If your credit history is poor you might struggle to get a debt consolidation loan without a guarantor. This is because financial providers sometimes need you to have a minimum credit score in order to be eligible for their products. Consider your other options carefully, as a guarantor loan isn’t right for everybody.
Is debt consolidation bad for your credit score?
Debt consolidation affects your credit score and can have either a positive or negative impact.
Your credit score will increase if debt consolidation means you:
- pay your debt back sooner
- lower your credit utilisation
- improve your credit mix
- make your repayments on time and in full
Your credit score will likely decrease if you:
- make lots of credit applications
- open a new line of borrowing
- don’t make your repayments
It’s also important to note that your credit score will take a momentary dip when you take out new credit. This is because the lender leaves a footprint on your credit history when they consider your application.
Factors to consider before consolidating your debt
Debt consolidation is a big financial decision. Consider these four factors carefully because making a choice.
1. Should I wait and improve my credit score?
You may want to wait and improve you credit score if you think this will give you access to better interest rates in the future. However, if you’re finding managing repayments on multiple forms of credit stressful, or too expensive, you might not want to wait.
2. Will a debt consolidation loan save me money?
Getting a debt consolidation loan with a good interest rate could mean you end up paying less money back in total - compared to if you paid your debts back individually. Work out the total amount you currently owe, including interest, and see if you can find a better deal available.
Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.
3. Shop around using an eligibility checker
When shopping for different types of credit it’s important that you use an eligibility checker to see whether you’re likely to be accepted before applying. This tool won’t impact your credit score or leave a footprint on your credit report.
Otherwise, you risk making multiple applications (especially if you’re struggling to get accepted) and damaging your credit score further. This can give lenders the impression that you're desperate for cash, which can put them off.
4. Consider speaking to a debt charity
If you’re struggling to meet repayments on your debt, consider talking to a debt charity. StepChange offer free confidential debt advice. You can also get in touch with Citizen’s Advice who can point you in the right direction.
Check your eligibility for a debt consolidation loan
- Reduce your monthly payments
- Personal and homeowner loans available
- Getting a quote is FREE and won't affect your credit score
Intelligent Lending Ltd is credit broker, working with a panel of lenders. Homeowner loans are secured against your home.