Consolidate Bad Credit Debt - Getting on the Right Track
The bad credit debt cycle - late payments, taking more debt, lower credit score, and the scramble for new credit to pay off increasingly expensive debt – is frustrating, stressful and unproductive. Finding the right track to debt freedom, or how to consolidate bad credit debt, is not an easy task, as you need to switch tracks, and change your spending habits.
You can improve bad credit and you can consolidate bad credit debt. No matter which consolidation tactic you use, first make a road plan. Then you can decide if your situation is appropriate for a long uphill ride, a rough bumpy detour. Here are some steps that you can take to improve your situation:
- Mapping out the Route or Road Plan - Budget
- Long uphill ride – Credit Counseling
- Rough Bumpy detour – Debt Settlement
- Alternative Routes - Bankruptcy
Road Plan – Making Your Budget
Knowing that you have financial problems is easy. It is not usually so easy to deal with your bad credit debt problems. Emergency bills, loss of income or overspending are three common reasons for debt problems. Here are some signs of bad credit:
- You don’t make your payments on time.
- You use too much of your available credit balance. (If you have a credit card balance of $10,000, then do not use more than $3000).
- You apply for too much credit.
- You apply for too many credit cards, in too short a time.
You can measure your bad credit by your credit score or your DTI ratio. A low credit score or a high DTI prevent you from taking on low interest debt. Your first step is to map out your route.
Setting up a budget is your first step. If you do not have a personal budget, then use the Bills.com personal budget guide. Make sure that you can answer these questions:
- Do you have a positive or negative cash flow?
- Where can you cut back on your expenses?
- What is your debt to income ratio? How much of your income goes to servicing debt?
Making a budget is not an answer to your problems; however, it is a guide or a road map to help you determine the best means of transportation and the best route to take.
Long Uphill Ride – Credit Counseling
If you can make your minimum payments, but need a push to get over the hill, then credit counseling is a good bad credit debt-consolidation solution. It is a long uphill ride, but if you take these steps, you will both improve your credit and solve your debt problems.
- Receive counseling from a credit counselor, including budget counseling and education about proper financial management.
- If appropriate, enroll in a debt management program. A debt management company negotiates with your creditors (mainly credit card companies) lower interest rates and fees. Each month you make one consolidated payment into a special account, and the debt management company then transfers the appropriate sum to each creditor.
- Make sure that you make all your payments on time, especially during the transition period.
- You pay the credit counseling and debt management company an upfront fee as well as monthly payments.
- It takes about 5 years to complete the program.
- Your credit will improve as you make monthly payments on time and lower your debt utilization.
Rough Bumpy Detour – Debt Settlement
Late payments, collections calls, threats of lawsuits are all warning bells that you need to deal with your debt problems. If you cannot see a way to re-arrange your debt because existing minimum payments are out of your reach, then consider a debt settlement program. It is a bumpy road, but if you can put your bad credit debt behind you use a debt settlement company.
Start the path by receiving an initial free consultation to determine if you are a good candidate for debt settlement. In order to qualify you will need to show a hardship, otherwise your creditors will not negotiate a settlement. It is a bumpy road because:
- You stop paying your creditors.
- Your credit goes down further.
- Your creditors continue with collection efforts, including collection letters, calls and possibly lawsuits.
If debt settlement is the right track for you, then:
- You stop making your monthly payments to your creditors. Enrolled debt includes credit card debt, installment credit, and some medical and private student loans).
- You open a special designated account, in your name (and make sure in a FDIC account).
- You make monthly payments into your consolidated bad credit debt special account.
- The debt settlement company negotiates a settlement with your creditors. It also helps you deal with collection calls and threats.
- Once the debt settlement company reaches a settlement, you transfer money to the creditor and pay the debt settlement company. (Avoid up-front fees, and only pay the debt settlement company for services rendered and settled accounts).
- Debt settlement is a bumpy road, and usually takes 2-3 years to complete.
Many people find it hard to finish both a debt management and a debt settlement program. Remember, you have to be prepared to take either a long up-hill road or a bumpy road.
Alternative Routes - Bankruptcy
For some people the best route is to get off the train and get on a different track. One possible solution is bankruptcy, although you will have to show a strong hardship. Chapter 7 bankruptcy allows you to discharge your qualifying debts without paying them, and hold on to certain assets. A chapter 13 bankruptcy is a court supervised payment plan, whereby you pay back your creditors over a 4-5 year period. You are protected from lawsuits during this period. Bankruptcy is a complicated route. If deemed the correct route, then consult with an experienced bankruptcy lawyer.
How to Consolidate Bad Credit Debt? – Perseverance
No matter which route you choose, be perseverant. Getting out of debt is harder than getting into debt. Choose the track that fits your situation. As your bad credit improves, you can look for other solutions, including maximizing your payment schedules and loan consolidation options, such as a cash-out home refinance loan.
Bad credit is not an excuse to avoid taking care of your debt problems. Use the best consolidation bad credit debt method. Remember, make your plan and stick to it.