Is Debt Consolidation Good for People with Bad Credit?

Many people ask the question "Is debt consolidation good for your credit?" Many wonder whether debt consolidation will negatively affect your credit score. Here are a few things to consider about debt consolidation and your credit score.

Consolidation Methods

The first thing that you need to look at are the different methods that you can consolidate debt. One popular way to do so is through a home equity loan. You will get a much lower interest rate than normal and you can deduct the interest on your taxes. 

Another common way to take control of your debt is through a credit counseling service. Many people consider this debt consolidation because you are only making one payment towards debt each month. This involves a third party that works on your behalf to help you with your creditors. They will take your payment each month and distribute it accordingly to your creditors. 

Affect on Credit

Do these popular methods actually hurt or help your credit? Are they good for people that already have bad credit? First of all, you should realize that if your credit is too bad, you probably will not be able to get a home equity loan. Lenders have strict criteria on credit scores. Therefore, they will only loan you the money to consolidate your bills if you have a decent credit score. This means that you will have to have at least a satisfactory credit score in most cases to get a debt consolidation loan.

With the other method of debt consolidation, things are a little bit different. You are not actually borrowing any money from anyone. Therefore, it does not matter what your credit is. You will be joining a debt management program that will help you get out of debt. Their main function is to negotiate a payment plan with your creditors and lower their interest rates. They will take the money from you each month and make your payments. This type of program will have a slightly negative effect on your credit rating. 

Positive Aspects

With that being said, if you already have bad credit, these programs are usually good for you. When you are deep in debt, you typically get behind on your payments. You skip payments or make payments late on a regular basis. With a debt management program, they will get you on a regular schedule. They will deduct the amount for all of your debt payments from your bank account once a month. They will then be responsible for getting the money where it needs to go on time. This will be reported as on-time, regular payments to the credit bureaus. On-time payments are one of the most important things in the eyes of the credit bureaus. Therefore, this will help boost your credit score and get you out of debt in the long run. 

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