7 ways you can consolidate your debt if you have bad credit (2024)

How to consolidate debt with bad credit

Debt consolidation involves taking out credit to pay off some or all your existing debt. You’ll still need to pay back what you owe, but you’ll be paying a single interest rate instead of different rates to multiple lenders. The ways you can consolidate debt include:

1. debt consolidation loan
2. homeowner loan (secured loan)
3. personal loan (unsecured loan)
4. credit card
5. guarantor loan
6. credit union loan
7. loan from family or friends

To make the best decision for you, consider your affordability and use eligibility checkers, before you apply.

Running these checks will show you what you qualify for, without affecting your credit score.

Spreading a loan over a longer timeframe usually means lower monthly payments. But it can increase the amount of interest you repay in total. Early repayment charges may apply if you pay off existing loans early.

1. Bad credit debt consolidation loan

A bad credit consolidation loan works just like a regular loan, but it’s usually easier to get approved if you have a poor credit score.

Lenders may charge higher rates to balance out the risk they’re taking. So, you would need to check if you can get a better rate than you’re currently paying. There are two different types of debt consolidation loan: secured and unsecured.

2. Homeowner loan

A homeowner loan (or secured loan) is designed for homeowners because it’s tied to your property. With this added layer of security, the lender may be more willing to lend you a larger sum of money with a lower interest rate – even if you have bad credit.

Remember to only ever borrow what you need and can afford to repay. If you fall behind on repayments, the lender could repossess your property to claw back funds. However, this is usually a last resort.

3. Personal loan

With a personal loan (or unsecured loan) there’s no collateral involved, so you don’t need to be a homeowner to apply. However, without your home as a safety net, you might find it harder to get accepted. This is because there’s more risk involved for the lender.

If you are approved, you may face higher interest rates than with a secured loan. The best rates are usually given to those with the highest credit scores.

4. Credit card

Consolidating credit card debt involves transferring any existing balances to a new credit card.

If you have poor credit, you may be eligible for a credit card for bad credit (also known as a credit builder card). They work just like regular credit cards, but they are easier to get if you have a poor credit score - though higher interest rates tend to apply.

Before you decide whether to go ahead, it’s best to check if you’re eligible for lower rates than you’re currently paying. Also, consider if the credit limit on a new card is high enough to clear all your existing credit card balances.

Some balance transfer credit cards come with an introductory rate of 0% for a certain period – though the best rates are for those with high credit scores. Providing you clear the full balance within the introductory period, you won’t have to pay any interest. Balance transfer fees usually apply though.

5. Guarantor loan

If you’re struggling to get accepted for a regular loan, you could consider a guarantor loan instead.

Guarantor loans are designed for those with a poor credit history. They work like personal loans but involve a guarantor (like a close family member) co-signing the loan agreement to promise that they will pay if you don’t. A guarantor normally needs to have a good credit score to balance out the risk the lender is taking.

Being a guarantor is legally binding. Make sure you and your guarantor fully understand the risks involved for both of you. For example, any missed payments will affect their credit score as well as your own.

6. Credit union

Credit unions are non-profit institutions run by their members. Money is deposited by members and is available for the other members to borrow. You could consider applying for a loan through a credit union if you’re struggling to get accepted elsewhere.

Bear in mind that they usually require you to have a common bond. For example, you might need to share the same profession or live in the same neighbourhood. You can find out if you’re eligible for one via The Association of British Credit Unions Limited.

7. A loan from family or friends

You could consider asking family or friends if they’re willing to lend you money. Perhaps they could offer you a loan on an interest-free basis. But remember, you’ll be tied to a repayment plan if the loan is legally binding. If you stop making your repayments, you could damage your relationship with them irreparably.

If this is a route you want to take, make sure that both parties are comfortable with the arrangement from the start.

What do lenders look for?

Each lender has their own eligibility criteria. However, there are some common things they all tend to look at, including your:

• credit history
• credit score
• income and outgoings
• address history
• credit utilisation ratio

Credithistory and credit score

Lenders look at your credit report to see how well you’ve managed your money in the past. This gives them an idea of your creditworthiness and how risky it would be to lend to you. The higher your credit score is, the more likely you’ll be approved for finance.

Income and outgoings

Lenders check your affordability for credit by looking at the money you’ve got coming in and going out.

Address history

If you’ve moved around a lot, they might be more worried about lending to you. This is because you could be harder to contact if you don’t have a fixed permanent address.

Credit utilisation ratio

Your credit utilisation ratio is the percentage of available revolving credit you are using. Revolving credit refers to lines of borrowing with no set end date, such as credit cards and store cards.

You could improve your credit score and eligibility for finance by reducing your overall credit utilisation ratio to 30% or less. For example, a £300 balance on a card with a £1,000 credit limit, or £600 of debt across two credit cards with a combined credit limit of £2,000.

Is debt consolidation bad for your credit score?

Debt consolidation can have either a positive or negative impact on your credit score, depending on several factors.

Your credit score will increase if you:

• pay your debt back sooner
• lower your credit utilisation ratio
• make your repayments on time and in full

Your credit score will likely decrease if you:

• miss payments (markers will stay on your credit report for six years)
• make lots of credit applications at once
• open a new line of borrowing

Your credit score will take a momentary dip each time you apply for, or take out, a new line of credit. This is because the lender runs a hard check, which leaves a footprint on your credit report. Your credit score should recover if you always pay on time.

Factors to consider before consolidating your debt

Debt consolidation is a big financial decision. Consider these factors carefully before applying:

1. Should I wait and improve my credit score?

It could cost you less if you can find a debt consolidation loan (or credit card) with a lower interest rate than you’re currently paying. Work out the total amount you owe, including interest, and see whether you can find a cheaper deal.

2. Will a debt consolidation loan save me money?

Getting a debt consolidation loan with a good interest rate could mean you end up paying less money back in total - compared to if you paid your debts back individually. Work out the total amount you currently owe, including interest, and see if you can find a better deal available.

Be aware, you may pay more interest in total if you spread your repayments over a longer timeframe. And if you are paying off loans before the end date, early repayment charges may apply. So, it’s best to check with your lenders first.

3. Shop around using an eligibility checker

It’s worth using an eligibility checker to see whether you’re likely to be accepted, before applying. Unlike a credit application, this tool only runs a soft check of your credit report. So, it won’t affect your credit score or leave a footprint for lenders to see.

4. Consider speaking to a debt charity

If you’re struggling to meet repayments on your debt, consider getting free, expert advice from Money Wellness, Citizens Advice, National Debtline or StepChange. We also suggest that you get in touch with your lenders to see if there is anything they can do to help.

Check your eligibility for a debt consolidation loan

• Reduce your monthly payments
• Personal and homeowner loans available
• Getting a quote is FREE and won't affect your credit score

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Intelligent Lending Ltd is a credit broker, working with a panel of lenders. Homeowner loans are secured against your home.

Disclaimer: All information and links are correct at the time of publishing.