Debt Consolidation Loans With a 500 Credit Score - The Complete Guide

Debt consolidation loans with 500 credit score

By Janet Berry-Johnson, CPA

Are you struggling with high-interest credit card debt? You’re not alone.

According to Experian, the average credit card balance is nearly $6,200, and Americans, on average, carry four credit cards. Consolidating those balances into one, can make it easier to pay a single bill every month rather than juggling three or four payments with different due dates.

But can you get a debt consolidation loan with poor credit? It can be challenging to find consolidation loans for bad credit, but there are options.

Here’s what you need to know if you’re shopping for debt consolidation with bad credit.

In this article

What is debt consolidation?

Debt consolidation involves taking out a new loan to pay off other high-interest debts. It streamlines your monthly payments. Plus, if you qualify for a lower interest rate, you could save money and pay off your balance faster.

Pros of debt consolidation loans

Pro 1: Lower interest rates

If you qualify for a debt consolidation rate with a lower rate than you’re paying on your credit cards and other debts, you may be able to lower your monthly payment and pay off your debt faster.

Pro 2: One payment, one due date

Consolidating several monthly payments into one makes it easier to avoid late and missed payments, which can further damage your credit score.

Pro 3: Defined loan terms

Debt consolidation loans typically have fixed monthly payments and defined repayment periods. So if you take out a 24-month loan and make payments as scheduled, you can be debt-free within 24 months – as long as you don’t continue using credit cards or taking out other debts.

Pro 4: May improve your credit score

A debt consolidation loan could help improve your credit score by lowering your credit utilization ratio and improving your history of on-time payments.

Cons of debt consolidation loans

Con 1: Origination fees

An origination fee is an upfront fee that a lender charges to cover the cost of processing your loan. The fee may range from 1% to 5% of the loan amount, so it can quickly eat into the savings you obtain from getting a lower interest rate on your loan.

Con 2: Prepayment penalties

Some lenders charge a prepayment penalty to ensure their profit if you pay off your loan early. The prepayment penalty may be a percentage of the original loan amount or a percentage of the remaining balance.

Be sure to read through the fine print to understand whether your loan has a prepayment penalty. They’re not all that common, so you might want to shop around to find a lender that doesn’t charge them.

Con 3: May lower your credit score (initially).

When you apply for a debt consolidation loan, the lender will perform a hard inquiry on your credit report.

A hard inquiry can initially cause your credit score to drop by five to ten points. However, your score will usually bounce back within a few months, assuming everything else in your credit history remains positive.

What is the minimum credit score required for debt consolidation loans?

Like most loans, the higher your credit score, the easier it is to qualify.

According to U.S. News & World Report, the best debt consolidation lenders require a credit score of 580 or higher. But even with poor credit, there are still ways you can consolidate your debt.

However, most debt consolidation loans for poor credit come with high interest rates. So even if you qualify, you may find that your new interest rate is higher than the rates on your current credit cards or other loans.

That’s why it’s important to consider what you’re trying to achieve by consolidating your debts.

If your main focus is on streamlining your finances, getting the best debt consolidation loan rates may not be as important as having one monthly payment. However, if you want to speed up your debt repayment timeline, getting a lower rate might be critical.

Options for debt consolidation loans

Here are some debt consolidation options you might try:

LendingTree

LendingTree is a loan marketplace that matches people looking to consolidate their debt with lenders who have products that fit the borrower’s needed.

Minimum credit score: 500

LendingPoint

LendingPoint offers loans for debt consolidation in 34 states and the District of Columbia.

Minimum credit score: 585

OneMain Financial

OneMain Financial operates in 44 states. They offer debt consolidation loans up to $20,000. However, due to its high interest rates and origination fees, it’s not a great option for borrowers looking to reduce costs.

Minimum credit score: Not disclosed

SoFi

SoFi offers debt consolidation loans without origination fees. Typically, the company requires a minimum credit score of 680. However, SoFi accepts co-borrowers.

So if your credit history isn’t quite strong enough to qualify on your own, but you have a parent or other family member with good credit who is willing to take on the responsibility of making payments if you fail to pay, you may be able to qualify.

Minimum credit score: 680 (unless you have a cosigner)

Alternatives to debt consolidation loans

A debt consolidation program isn’t the right choice for everyone. If you have serious credit problems, you might have trouble qualifying for a decent interest rate. In that case, getting a debt consolidation loan might not be worthwhile.

Here are some other options to consider.

Debt management plan

Debt management plans are offered by credit counseling organizations to provide financial help for bad credit. The credit counselor negotiates with creditors on your behalf to waive fees, lower interest rates, and create a new payment plan.

Once you start the debt management plan, you’ll make a single monthly payment to the counseling agency, and the agency will distribute money to your creditors.

Credit counseling agencies may charge an initial setup fee ranging from $30 to $50, as well as a monthly fee ranging from $20 to $75. But if they can lower your interest rate and help you get out of debt faster, that savings can more than cover the cost.

However, don’t confuse debt management with debt settlement.

Debt settlement (sometimes known as debt relief) companies offer to help settle your debts with creditors for less than you owe. Often, a debt settlement company will advise you to stop paying your creditors while they negotiate. This can further damage your credit and result in you being sued.

The CFPB recommends finding a reputable credit counseling organization through the Financial Counseling Association of America or the National Foundation for Credit Counseling.

Be sure to check out any potential counseling organizations with your state attorney general’s office or state consumer protection agency.

Balance transfer credit card

Some credit card issuers offer a 0% rate on balance transfers for an introductory period – usually six to 15 months. If you transfer your existing balances to the new card and pay off the balance within the promotional period, you may be able to save a significant amount of interest.

However, balance transfer cards usually come with a transfer fee of 3% of the balance being transferred. Be sure to take that fee into consideration when estimating your potential savings.

The terms of the balance transfer may also depend on your credit.

Home equity loan

If you own a home and have considerable equity built up, you may be able to qualify for a lower rate by refinancing your debt with a home equity loan. Because these loans use your home as collateral, interest rates usually are lower than those available through unsecured loans to consolidate debt.

If you can’t make the payments though, you could lose your home.

Bankruptcy

Bankruptcy can provide a fresh start if you’ve gotten into financial difficulty and can’t repay your debts. However, the financial consequences are long-lasting and far-reaching. A bankruptcy will stay on your credit report for seven to 10 years and makes it difficult to get credit, buy a home, or even rent an apartment.

If you think bankruptcy might be your best option, talk to a government-approved credit counselor (the U.S. Department of Justice provides a searchable directory by state).

Reach out to individual creditors

Credit counselors aren’t the only ones who can negotiate with creditors. Try reaching out to your credit card companies and other lenders to see if they will reduce your interest rate, waive certain fees, accept a lower monthly payment, or change your monthly due date.

If you’re successful, you might be able to enjoy the benefits of a debt consolidation loan without taking on new debt.

Improve your credit score

If a low credit score won’t allow you to qualify for a debt consolidation loan with a reasonable interest rate, consider working on improving your credit score before applying.

Here are a few ideas to get started:

1 - Check your credit report.

Order free copies of your credit report from each of the three major credit rating agencies at AnnualCreditReport.com and review it for errors. If you find any accounts incorrectly reported as late or delinquent, debts listed more than once, or accounts with incorrect balances or credit limits, contact the reporting agency to dispute the inaccurate information.

Often, your credit score will improve when errors in your report are corrected.

2 - Pay your bills on time.

Payment history is one of the most heavily weighted factors in calculating your score, so make an effort to avoid late or missed payments. Set up automatic payments or calendar reminders to ensure you pay on time every month.

This won’t immediately raise your credit score, but older late payments have less of an effect on your score than more recent ones.

3 - Don’t close unused credit cards.

As you pay off debt, you might think it’s a smart move to close unused credit cards, thus eliminating the temptation to run up a new balance.

However, closing those accounts can increase your credit utilization ratio – the amount of revolving credit you’re currently using, divided by the total amount of credit you have available. Credit utilization is another major factor in how your credit score is calculated. So by closing an unused account, you might lower your credit score, even though you owe the same amount.

If your credit score is just a few points away from applying for a better rate on a debt consolidation loan, taking steps to improve your score before applying could help qualify you for a better rate.

What to watch out for when shopping for a debt consolidation loan

Unfortunately, many scammers try to take advantage of people who are desperate to get out of debt. Here are some tips to help you avoid getting scammed or exacerbating your financial troubles.

Watch out for “teaser rates”

According to the CFPB, many of the low interest rates advertised by debt consolidation companies are “teaser rates” that only last for a short while. After that, your lender may increase your interest rate, which will also increase your payment amount.

Consider the full cost of your new loan

Between origination fees and prepayment fees, refinancing your debts into a new debt consolidation loan may cost more than simply continuing to make payments on your existing debt.

Other debt consolidation loans might lower your monthly payment but stretch your loan term out over a longer time. This could mean you’ll pay a lot more interest in the long run.

Be sure to run the numbers using a debt consolidation calculator to ensure consolidating your debt will really save money.

Be wary of debt relief promises that sound too good to be true

Some companies that offer bad credit debt relief programs promise they have access to a “special government program,” guarantee they can settle your debt for “pennies on the dollar,” or claim they can make all of your debt go away.

If a debt relief company’s promises sound too good to be true, they probably are. Before enrolling in any debt relief program, research the company online and with your state’s attorney general’s office.

Get out of the debt cycle

If you get a debt consolidation loan and keep making purchases on credit, you could wind up worse off than you were before. Create a budget, look for ways to earn extra income and adjust your spending so you can start better managing credit card debt.

A debt consolidation loan can be a useful tool for simplifying your finances and getting out of debt. Still, it’s smart to consider all of your options before taking going that route.

If you’re struggling to make your minimum payments, start by speaking to a reputable, certified credit counselor. They can help you review your finances and determine whether a debt management plan or debt consolidation is a good option in your situation.

About the author

Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, and several other major outlets.

Written on July 7, 2020

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