You've probably seen the ads for bad credit debt consolidation. Even if you're in debt up to your ears and haven't made a payment in months, these companies claim they can help you consolidate your debt in spite of your bad credit. After they have worked your magic, you'll be left with, "Just one easy monthly payment!"
Some companies legitimately want to help people with bad credit consolidate their debt. They usually charge reasonable upfront fees, avoid making extravagant claims, and offer professional references on request. Then there is the other type of bad credit debt consolidation company. This type of company preys on your fears and appeals to your hope that somewhere out there lies an easy solution. Unfortunately, the latter type of bad credit debt consolidation company is far more common than the former.
What Do Debt Consolidation Companies Do?
Bad credit debt consolidation companies talk to your creditors and try to lower your interest rates and monthly payments. Once they have reached an arrangement with your creditors, they will tell you the total amount you owe for the month. You will then send this money to the debt consolidation company, and the debt consolidation company will distribute the money to your creditors.
At least, that's what they're supposed to do. The companies running scams often keep the much of the money you send to them for "administration fees" or "loan origination fees"--even though no loan has been originated. This means that your creditors, who aren't receiving the money you send faithfully, will continue to harass you and report your account as unpaid to the credit reporting agencies.
Does Legitimate Bad Credit Debt Consolidation Exist?
Yes, but usually not through companies that send you emails or advertise on late night television. If your credit score is low, you probably won't qualify for an unsecured loan through a bank. You may, however, be able to refinance your house or your car to pay off unsecured debt. Talk to your bank or mortgage broker. You may also want to visit with a legitimate financial planner to assess your budget and find ways to stay out of debt in the future.
Another way to consolidate debt is to transfer all of your unsecured debt to one low interest credit card. This approach, however, has a few drawbacks. If your credit is truly in the toilet, the credit card company might hike up your interest rate without warning. Also, you need to do something with the rest of your credit cards (e.g., cut them up) to avoid the temptation to start new balances on them. Finally, you must make at least the minimum payment--more if you can afford it--to the card left with the balance of your debts.
Even if you have bad credit, debt consolidation is possible, but make sure you're working with a reputable company that really does want to help you get out from under your debt.