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How To Consolidate Debt With Bad Credit

How To Consolidate Debt With Bad Credit

Most consumers will already have bad credit when looking to consolidate and payoff excessive debt. Fortunately, there are a number of options and services available to individuals who may find themselves burdened with large amounts of debt and no clear path for tackling it. Let's look at some of the most common options available for consolidating debt, especially for consumers who may have already experienced bad credit as a result of missed payments or credit account charge-offs.

Request Your Credit Report

It is important to understand where you are if you are going to figure out where you're going. Fortunately, federal law requires the three major credit reporting agencies, Experian, Equifax and TransUnion to make available to consumers one free credit report every twelve months. Once you have your credit report in hand, you will be able to clearly see all outstanding lines of credit and how much is owed when deciding which debt to tackle first or how best to consolidate your total debt.

Deal Directly with Creditors

Creditors only get paid for money they've lent and subsequently receive interest on outstanding balances. To that end, most are often willing to work directly with consumers to either get caught up on outstanding balances or come up with a plan to pay off what is owed. Using your credit report, contact all creditors to initiate a dialogue and show you're being proactive about addressing the outstanding balances. Many will arrange payment plans and waive penalties and interest as incentives because an active account in good standing is more beneficial than one in default or charged off.

Home Equity Lines of Credit

If you are in the enviable position of owning your own home with a significant amount of equity built up over the years, you might want to consider using a home equity line of credit to consolidate your outstanding debt. A home mortgage loan or home equity line of credit allows you to combine many high-interest rate outstanding balances into a single payment at a significantly reduced interest rate. Credit cards with penalty interest rates can be 25% or more while most home equity lines of credit are in the 5% to 7% range. Home equity lines of credit also have the added benefit of the interest being tax-deductible.

Debt Consolidation Agency

The Federal Trade Commission provides information regarding nationally recognized reputable debt consolidation agencies consumers can choose when looking to tackle excessive debt. In order to protect yourself from debt consolidation scams, thoroughly research the organizations in question and evaluate their fee structure and other requirements. Choose one with a good reputation and a history of helping consumers get their debt under control and back on track financially.

Create a Monthly Budget

It is virtually impossible to get out off debt, with or without bad credit, without creating a monthly budget. A budget allocates limited financial resources to accomplish various goals such as paying off debt, saving for vacation or purchasing a new car. Creating a budget is a very simple process but generally speaking it separates needs from wants and then prioritizes each item in a descending level of importance. The goal is to eliminate wasteful spending while paying enough to reduce total debt over time.