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How will debt consolidation be different for me if I have bad credit compared to if I had good credit?
In this day and age, we live in a world in which good credit will get you everywhere and bad credit will get you nowhere fast. Having bad credit brings in a new set of rules in every financial situation, and even trying to get out of debt can be harder if you have bad credit.
If you have good credit and are thinking about consolidating, it can be as simple as asking your bank for a loan that covers all or most of your debt. With a clean credit rating, you probably will not have to secure the loan with collateral.
Collateral being a piece of property that you own that could cover the amount owed on the loan if you were to default. However, if you have property in your name or cars in your name, the bank may still ask you to use them as collateral because, no matter what, they are still taking a risk and they will cover that risk the best that they can no matter your credit rating.
By having good credit and choosing this route, you can lower the monthly payment that you make and lower the number of creditors you have to pay and you are helping your credit even further by paying off these debts and paying the new loan on time each month.
AAA refinancing is another option for an individual with good credit. You are able to refinance your home and receive the difference in equity. This is a great way for paying off high interest debts and one way in which many people go about it because the interest rate is usually fixed at a reasonable rate.
On the other hand, if you have bad credit it is unlikely that you will be able to obtain an unsecured debt consolidation loan as lenders (other than payday) typically do not approve unsecured loans to people with a bad credit rating.
However if you have a significant amount of equity (i.e. greater than 30%) in your home and have bad credit due to late payments on your credit cards or personal loans and have a reasonable employment history you may be able to consolidate your high interest debts (credit cards + unsecured loans) into one single loan against the equity in your home.
If you are able to do this you may be able to significantly reduce your repayments (and average interest rate) significantly. This in turn can make it easier for you to build up a history of payments and improve your credit rating and ultimately refinance to a new lower interest loan.
The risk with this type of loan is that if your spending habits do not change, and you accrue further credit card debt or unsecured loans, then you are simply destroying the equity you have built up in your home.
If you don't have equity in your home and are drowning in debt, there is another way to lighten the load. This involves using a debt administrator service, who will work with your creditors in order to negotiate smaller payments each month for your debts. This type of financial product is called a debt agreement.
It is an alternative to bankruptcy, and is an agreement between you and your creditors to pay back your debts.
In some cases it can greatly assist people experiencing financial difficulties by ending debt collection calls and potentially lowering their repayments as well as the actual amount that is owed, sometimes by as much as 40% or more. However entering a debt agreement will cause your credit rating serious harm in the short term and it will be difficult (if not impossible) to obtain further credit during this period.
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