The Pros And Cons Of Debt Consolidation For Poor Credit
If you’re considering debt consolidation for poor credit, consider these vital pros and cons before making such an important decision.
Around 80% of Americans carry some level of debt in loans, credit cards, and bills.
While most people stay current with their debt payments, around 5% of all household debt in the US is delinquent. The reasons range from understandable to perplexing.
If someone gets laid off without warning and can’t find work right away, it’s easy to understand. Someone maxing out their credit cards buying unnecessary things online is perplexing.
The end result is the same: damaged credit. The longer the problems go on, the worse the damage gets.
You can always try debt management strategies, like a debt snowball or debt avalanche. If those fail, another possible solution to consider is debt consolidation for poor credit.
Debt consolidation isn’t a clear-cut good thing or bad thing. It has pros and cons you need to know about.
Let’s jump in and take a look.
Pro — Fewer Payments to Juggle
If you have three or four credit cards along with regular bills like water and electric, that’s a lot of payments to manage every month. Automatic payments work great for people with enough income.
If you’re already behind, odds are good that your income doesn’t cover all of your payments. At that point, you have to start picking and choosing what to pay late. Miscalculate and you end up tacking on late payment fees and over the limit fees.
With debt consolidation for poor credit, you get to stop juggling so much. There’s the one payment you need to make every month for your debt.
Con — Fewer Options
People with fair to excellent credit get lots of options to restructure their debt. They can move credit card debt to a card with no interest for a year. They can take out personal or home equity loans.
If you’re looking for debt consolidation for poor credit, you don’t have many options. Poor credit means most credit cards won’t give you sweetheart no-interest rate cards. Banks aren’t interested in giving you a personal loan.
You have two main options: a secured loan or a debt management program.
You get a secured loan by putting up something as collateral, like your car or your home. The pitfall here is that if your situation changes and can’t make the payments, you lose your car or your house.
A debt management program aims to get you on track to pay off all of your debt within a fixed period of time. A credit counseling service negotiates for you with the companies that you owe money. You make a monthly payment and all of your creditors get a piece of it.
The pitfall with debt management programs is that you often give up the chance to apply for any kind of new credit. So no car loans, no new credit cards, and no mortgages until your debt gets paid off. It’s up to you whether the benefits outweigh the pitfalls.
Pro — Less Expensive
In most cases, debt consolidation is less expensive over the long haul.
Moving credit card debt to a no-interest account mean every cent you give them pays down the principle. It’s pretty much the only scenario you get that option.
Personal or secured loans almost always come with a lower interest rate than credit cards. So you rack up less interest over time and can avoid the constant flow of fees from your credit card companies.
If you enter into a debt management program, you also get some financial benefits to offset the restrictions. The counselor you get can often negotiate a lower interest rate on your credit cards. Just moving from 24% down to 12% will save you a lot of money.
They may also convince your creditors to forgive some or all of the fees they hit you.
Assuming you stick with the program and make all your payments, you also benefit from the improvement of your credit score. A better credit score will help make the rest of your life less expensive.
Con — Behavior Changes
Consolidating your debt isn’t necessarily a solution. Unmanageable debt often stems from poor financial decision-making. If you continue to treat money the same way, you’ll end up in the same spot.
You must change the way you handle money, which proves very difficult for some people.
Say you go out for dinner or drinks with your colleagues a few times a week. Let’s also say you pick up the tab most of the time.
You created a mental habit and built a lifestyle around that financial behavior. Moving forward, you’ll need to break the habit and deal with the social fallout of lifestyle changes.
Before you even start on the road to debt consolidation for poor credit, you’re better off making and committing to those changes. That way you aren’t tempted when the consolidation frees up a little money.
Pro — Mental Health Improvement
Carrying more debt that you can pay has mental health consequences. Not only is it stressful, it can actually lead to anxiety, depression or even a psychotic break.
Getting your debt under control helps relieve stress and stave off those scarier problems. There’s also a benefit in terms of your decision-making process.
Stress actually makes people give more weight to the possible benefits of a decision and less weight to the pitfalls. For example, a debt-ridden computer programmer might decide to buy an expensive computer.
He thinks it’s a good idea because it’ll let him work faster. That frees up some of his time to make extra money freelancing on the side. Then he’d be able to pay off his debt faster.
The problem with this line of thinking is that it slaps new debt onto the pile right now! Someone under less stress sees the problem of new debt as outweighing any potential benefits.
Final Thoughts on Debt Consolidation for Poor Credit
Debt consolidation for poor credit can work for you.
It can reduce your long-term debt costs. You get to cut down on the number of monthly payments and probably how much you pay out each month. It’s can even improve your mental health by lowering your stress levels.
You need to go in with your eyes open.
If your credit is in bad shape, you might only qualify for secured loans or a debt management program. You may need to give up the option to get new credit for several years. You’ll also need to make and stick with serious changes in how you manage money.
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