Can I get a debt consolidation loan if my credit is bad?

Americans have trillions of dollars in debt, and so naturally, there are plenty of people out there thinking about ways to pay theirs off.

For some, a debt consolidation loan could be an attractive option. With a debt consolidation loan, you take out a new loan and use it to roll up your existing debt under one monthly payment. The goal of a debt consolidation loan is to get a loan with a lower interest rate than all or most of your current debts. This could save you money in the long run and may help you dig out of the debt hole sooner as long as you don’t heap on more debt.

However, these types of loans aren’t a good fit for all debt. According to Christopher Viale, president and CEO of Cambridge Credit Counseling Corp, a debt consolidation loan is really right for only one type of debt — credit card debt.

The tricky part is that, in order to get a better interest rate, you’ll likely need a good credit score, Viale said. He considers the perfect candidate for a debt consolidation loan to be “somebody with good credit and good discipline.” Which means a debt consolidation loan might not be your best bet if your credit score is below 680, he said.

If your credit score is significantly below 680, raising it to that level can be tough. The best way to improve your score is to pay your bills on time (payment history typically accounts for 35% of your score), or to lower the total amount you owe (30% of your score). But if you’re considering a debt consolidation loan, you may already be struggling in one or both of those areas.

When it makes sense

There are some cases where a debt consolidation loan could work in your favor even if the interest rate is the same or slightly higher than the rates on your current debt. That’s because a debt consolidation loan is a term loan and the interest will not continue to compound on the loan like on a credit card, Viale said. “As long as you don’t use the credit cards again,” he added.

Many creditors will also agree to lower your interest rates and waive fees once you’ve consolidated your debt. Another advantage to a debt consolidation loan is that you only have to remember to make one monthly payment, instead of several. If bill payment is your kryptonite, that can hopefully help make it easier for you to stay on top of your payments.

But what about bad credit?

You’re not completely out of luck if your credit score is fair (a range of 580-669) or even poor (a range of 300-579). Some credit unions will give debt consolidation loans to people with poor credit, especially if you have an existing relationship with them. A few online lenders may also approve debt consolidation loans for people with fair or poor credit, but their interest rates may be very high.

You could also think about using a home equity loan as a debt consolidation loan. Because the loan will be secured with your house, you may get a better interest rate. The big risk is that you’re putting your house on the line if you fall behind on your payments. Unlike credit card debt, a home equity loan can’t be wiped out in bankruptcy.

Changing your mindset

If you’re considering a debt consolidation loan, you also have to be honest with yourself, Viale said. Will you overspend again?

Viale warns that relief from a debt consolidation loan might not help someone with credit card debt understand how they got there in the first place. That could lead to them overextending their finances again.

“It doesn’t change the habits if it doesn’t change the thinking,” he said.

For people who need more structure and guidance, debt management might be a better choice instead, Viale said. With debt management, you work with a credit counselor who negotiates with your creditors to lower your debt with lower interest rates and/or fees. Then you make one monthly payment to the credit counselor, who pays your creditors. Unlike with a debt consolidation loan, your credit score won’t matter.

Either way, the point of managing your debt is to end up in a better spot than where you started. Although it may be tough to get a debt consolidation loan if you have bad credit, it doesn’t hurt to look into it. Just make sure it will accomplish your goal of helping you pay down your debt more quickly and easily.

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