Can You Consolidate Credit Card Debt with Bad Credit?

When your credit score isn’t as high as you’d like it to be and you have credit card debt, it’s common to feel discouraged because you may think that there’s no way to consolidate credit card debt with bad credit.  If your payments are too high and straining your monthly finances, credit card debt consolidation may be the best option to reduce your payments and pay off your debt quickly.

At Addition Financial, we work with our members every day to help them get out of debt. If you’re working to pay multiple debts, then we’ve got good news: there are ways to consolidate your debt even if your credit score is low and your credit history is checkered. Here’s what you need to know.

What is considered high credit card debt?

There’s no one-size-fits-all answer to how much credit card debt is too much because your income level and overall debt picture play important roles in determining how much debt you can afford to carry. That said, there are three metrics you can use to determine if you have high credit card debt.

#1: Credit utilization

Your credit card utilization is a measurement of how much of your available credit you are using. You can calculate it easily by totaling your credit card balances, totaling the credit limits on all cards, and dividing the first number by the second. In other words, if you had $10,000 in credit card debt and available credit of $20,000, your credit card utilization would be 50%.

A good rule of thumb for credit utilization is to keep it under 30%. Many experts recommend utilization between 11% and 30% as being ideal. Keep in mind that credit card utilization is an important element in determining your FICO score.

#2: Debt-to-income ratio

Your debt-to-income ratio is what lenders use to determine whether you are a good lending risk when you apply for a mortgage, personal loan, or a car loan. You can calculate it by totaling your monthly debt payments, including your credit card debt, mortgage, car loan and other debts and dividing it by your total gross monthly income.

Most lenders require a DTI of 43% or less for loan approval. If your DTI is too high to qualify for additional lending, then that’s a good sign that your credit card debt may be too high.

#3: Credit card debt ratio

Your credit card debt ratio is a metric that tells you whether you can realistically afford your monthly credit card payments. You can calculate by totaling your monthly credit card payments and dividing that number by your net monthly income. For example, if you had net monthly income of $3,000 and credit card payments totaling $400, your credit card debt ratio would be 13.33%.

As a rule, your credit card debt ratio should be no more than 10% of your net monthly income. That said, if you find yourself struggling to find the money to make your monthly credit card payments, you may be carrying too much credit card debt even if your ratio is less than 10%.

What is considered bad credit?

Just as it’s important to know what’s considered high credit card debt, you should also know which benchmarks lenders use to determine if you have bad credit.

The most commonly used measurement of creditworthiness is the FICO score, which ranges from 300 to 850 and uses payment timeliness, credit utilization and other factors to calculate a consumer credit score.

A FICO score below 580 is generally considered to be poor credit, while a score of 670 or higher is considered to be good. Scores over 740 are in the “very good” category while scores over 800 are considered excellent credit.

Options to consolidate credit card debt with bad credit

People who want to consolidate their credit card debt typically have two options, excluding things like private loans. They are as follows:

  • Getting a balance transfer credit card. A balance transfer card is a card that typically has a low introductory interest rate and allows you to transfer debt to the new card. The result is a monthly payment that is usually lower than the total debt payments prior to the transfer and a lower interest rate. There are some potential downsides. For example, many credit card issuers charge a balance transfer fee that can be between 3% and 5% of the amount transferred. Also, introductory rates always have an expiration date.
  • Consolidating debt with a personal loan. A debt consolidation loan is a personal loan that provides borrowers with funds to pay off their credit card debts. Like all loans, a consolidation loan comes with a closing fee that may total between 2% and 5% of the loan amount.

The most important thing you need to know about debt consolidation with bad credit is that it may be difficult to qualify for a balance transfer credit card if your credit score is low. Most lenders require a minimum score of 690 to qualify.

Where to get a debt consolidation loan with bad credit

Many lenders offer debt consolidation loans, so let’s look at the usual requirements before we talk about some options if you have bad credit. Here are the requirements many lenders use for debt consolidation loans:

  • At least 18 years old
  • Not involved in a bankruptcy or foreclosure
  • Credit score of at least 650
  • Debt-to-income ratio maximum of 45%

You should keep in mind that you’ll need to pay closing costs for any personal loan and they can total between 2% and 5% of the amount you borrow. For example, if you borrowed $10,000, you should expect fees between $200 and $500 for your loan. You may have the option to roll the closing costs into your loan, but remember that will increase your monthly payment.

You’ll need to provide proof of income and employment and may also be required to provide copies of your tax returns if you’re self-employed or have income from investments.

The good news is that there are some lenders, particularly credit unions, who will extend a credit consolidation loan even if your credit is bad. Addition Financial works with members with low credit scores to help them get out of debt. Our Signature Loans provide up to $30,000 to help members pay off their debts and there’s no prepayment penalty.

Does debt forgiveness hurt your credit?

If you can’t qualify for a debt consolidation loan or a balance transfer credit card, the other option available is to apply for debt forgiveness. Debt forgiveness for credit card debt is offered when a debtor can demonstrate financial hardship to the credit card issuer or—when an account has been referred to collections—to the collection agency.

You already know that being late with credit card payments will negatively impact your credit. The timeliness of payments is responsible for 35% of your credit score, more than any other metric. If your credit card debt is forgiven, then there will be no more late payments on the forgiven credit card balance. Your credit utilization, which is responsible for 30% of your score, will also decrease. The result is likely to be an improvement in your score over time.

credit card debt consolidation infographic

What is the role of a budget in credit card debt management?

Regardless of whether you consolidate your existing debt or create a debt repayment plan, budgeting is an essential element of managing your credit card debt. Without a budget, it’s easy to fall into (or persist with) unhealthy spending habits that can lead to more debt.

If you want to pay down your debt, we suggest creating a monthly budget and debt management plan that leaves you with enough money to make all monthly debt payments. The best case scenario would be a budget that allows you to make more than the minimum monthly payment.

Depending on your income and your debt situation, you may want to use the avalanche method, which involves putting any extra money in your budget toward the credit card with the highest interest rate, or the snowball method, which involves putting extra money toward the card with the highest balance. Either way, you’ll be actively paying down your debt while still having the money needed to pay your other monthly expenses.

Budgeting tools to use

At Addition Financial, we have an array of tools that are available to help our members manage their money effectively and pay down debt. Here are some to try:

These calculators may be used whether you consolidate your debt or not. The most important thing to remember is that paying off your debt as quickly as possible will help you save money in the long term and improve your credit score, making it easy to get credit in the future.

Consolidate your debt with Addition Financial Credit Union

Even if you have bad credit, there are debt consolidation options to help you consolidate your credit card debt and reduce your monthly payments, including debt consolidation loans.

Do you need help consolidating your credit card debt? Addition Financial Credit Union is here to help! Click here to read about our Signature Loans and apply today.

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