Should you consolidate your debt if you have bad credit?
A debt consolidation loan lets you turn multiple debt payments – credit cards, store cards, overdrafts or loans – into one convenient payment. This type of loan is a good option if you want to reduce the total interest you pay on any outstanding debt by finding a loan with a lower interest rate.
Debt consolidation can boost the credit scores of consumers struggling to manage several debts such as high-interest credit card debt and student loans — if used properly. That said, there are some scenarios in which consolidation could, in fact, cause more harm than good to your credit score.
Trying to consolidate debt with bad credit is not a great idea. If your credit rating is low, it is hard to get a low-interest loan to consolidate debts, and while it might feel nice to have only one loan payment, debt consolidation with a high-interest loan can make your financial situation worse instead of better.
When consolidating debt, work out the amount of the loan you will need and check the interest rate, as rates are usually tiered depending on how much you borrow. As a general rule, rates are lower the more you borrow, but don’t forget the golden rule: never borrow more than you can afford to repay.
If you think you might be able to pay off your debt consolidation loan early, check to see if there are any penalties for doing this. Remember that the longer you take to pay it off, the more interest you will pay overall.
If you choose a debt consolidation loan shop around using comparison websites to find the best deal. Get advice before you make a final decision. There might be better ways to clear your debts that you haven’t thought about. Do not just look at the headline interest rate. Compare the APR (the annual percentage rate), or the APRC for secured loans, as this will include extra costs such as an arrangement fee.
And finally cut up your credit cards to avoid the temptation to keep spending. For more helpful hints on how to become a savvy spender and how to plan for the year ahead.
