Yours can be a particularly vexing problem. You’re in debt up to your ears AND you have bad credit. You know you can’t resolve your situation by yourself but what to do? Believe it or not, you have options. Let’s take a look.
What is a Bad Credit Score?
If you have bad credit, it’s difficult to emerge from debt. If have a load of debt, it’s hard to build the good credit required for remedies like debt consolidation loans.
If you want to know how to get out of debt with poor credit, it helps to know what’s considered poor credit. Basically, the answer is anything between scores of 300 and 559. A “fair” rating is anything between 560 and 669, while anything above 670 is deemed “good.” Between 740 and 799 is considered “very good,” and if your score exceeds 800, well, you’re in a select club. But that’s not you – yet.
How to Improve Your Credit Score
The top ways to bolster your credit score are to make timely payments and keep your credit utilization low — spend less than 30% of available credit. Payment history and credit utilization have the biggest effect on your score.
It helps to diversify your credit portfolio but there’s a delicate balance when it comes to credit repair, since applying for a variety of loans in a short period of time can cause the three major credit bureaus to bring your score down. What’s most important for now is staying on top of your payments.
Bad Credit Debt Relief Options
While you do have options, you did not get into debt overnight, so you will need to exercise patience and diligence while putting your solution to work.
This option allows you to, for a fee, settle your obligation for less than what you owe. The process usually takes a few years, and debt settlement companies usually advise you to cease paying your creditors to motivate them to “settle.” This will hit your credit score, but then, your score is likely already damaged.
This is a personal loan that you use to pay off debts – usually high-interest credit card balances. You can save money if you can get a loan with a lower interest rate than what you’re paying aggregately on current debt. The financial strategy also streamlines bill paying since, as opposed to multiple monthly bills of various amounts and due dates, you only have one fixed payment of the same amount.
The rub is that you need good credit to get a loan at an APR of about 7%, and your score is likely in the fair or less range. That means that you’ll probably pay rates of around 15% to 20%.
If you can’t swing a good enough rate for debt consolidation to make sense, you may want to consider a debt management program. With these, you make a single monthly payment, which gets disbursed to your creditors. The program agent may be able to negotiate lower interest rates or reduced fees and provide overall advice about budgeting and related matters.
Home Equity Line of Credit
If you own a house, you may want to consider taking out a home equity line of credit – a line of credit that matches up to 80% of the equity in your property. Because your home is on the line if you default on payments, interest rates are usually lower than those for personal loans.
Because your credit score is also factored in with this solution, perhaps you should first work on your credit before applying.
Alas, there are times when this is the best option. Still, you shouldn’t take the decision to file lightly. For one thing, the filing stays on your credit report for a decade, during which time it’ll be hard if not impossible to get other loans. Still, the strategy undeniably gives consumers a fresh start.
Now you know how to get out of debt with poor credit. Choose your strategy and stick to it until you’ve regained your financial footing.