Deciding to take your financial life back into your hands is a powerful and motivating feeling. When trying to address debt issues, though, too often, we get held back right at the beginning because we look around and wonder, ‘How am I ever going to make this work? I already have bad credit!’
You absolutely have options if you’re looking for debt help but have a ‘bad’ credit history. Let’s take a look at what these are as well as how to address that bad credit while you’re at it.
Do You Need Help with Your Debt?
To get out of debt, you’ll want to take advantage of the various options you have. Not all will address your specific situation so make sure you know what the advantages of each are or seek free financial advice to help you sort it all out.
The first steps to getting debt help are in your hands. You’ll want to get a top-down view of the amounts you owe, the interest rate on each and what the payment schedule is. Work out your present financial position in relation to these debts — are you having trouble making payments on time?
Debt and bad credit are often linked: If you find yourself in perpetual debt, unable to stay on track with your payments, this may result in missed or late payments. And this negatively affects your credit rating.
Either by approaching your creditors yourself or working with a debt negotiating service that can liaise with your creditors on your behalf, you can begin by trying to re-negotiate terms with your creditors. These include re-negotiating the interest rate, requesting a payment rearrangement or making a small lump sum payment.
You can also seek temporary debt relief by presenting a ‘declaration of intention to present a debtor’s petition’ (DOI). Once you file this, you’ll receive protection for 21 days from unsecured creditors who cannot take action to recover their debts. You can use this time to consider your path towards becoming debt free.
Bad Credit History
If you fail to keep up with your payments on your loans, credit cards or store cards, these missed payments will show up on your credit report. Accumulate enough of these missed payments and you’ll end up with a progressively lower credit score.
It’s not just the missed payments that end up accumulating — it’s the interest rate on the total amount owed that progressively but persistently increases the time you are in debt for.
Eventually, even if you are making repayments, the interest rate on these separate loans or credit card debts may become so unmanageable that you cannot escape the cycle — and it’s because you’re busy paying off interest, never getting the chance to make a dent in paying off the principal amount owed. It’s hard to get a handle on something that grows faster than you can address it.
This is precisely how consumers are kept in the loop — unless they take steps to simplify the process through options like debt consolidation loans, a Debt Agreement, declaring bankruptcy, balance transfers or even mortgage refinances.
You can see how quickly debt can spiral out of control and contribute to a bad credit history. Conversely, it only takes a 25-30 point gain to go from ‘bad’ credit to ‘good’ once more. And getting debt help is precisely what can help the situation.
Here’s the bind that most individuals with bad credit face, however: The options listed above are all types of loans. Even a balance transfer depends on you being able to successfully apply for and receive acceptance for a new credit card. But that’s not very likely if you have bad credit since credit ‘worthiness’ depends on your previous credit history.
Is it a catch-22? Or are there creative options that can help?
Bad Credit Debt Help Options
If you have bad credit but need debt help, know this: There are absolutely options for you. But you’re going to have to be okay with the fact that, for a while, you’ll be paying higher interest rates than someone with good credit. It’s not a hard pill to swallow when you think about the fact that this is a surefire way to get out of debt.
And it’s ‘for a while’ because, as you consistently make payments on time and keep up with your financial commitments, you’ll be able to secure credit with better rates, negotiate better terms and get your credit rating back up where it belongs
If you don’t get a loan right away to pay off your debts, you might tackle the bad credit situation before applying for a loan to help with the debt. Cleaning up your bad credit history and then applying for a loan might get you more favourable loan conditions.
If you do, however, need a loan for debt relief, there are a couple options for you, even with bad credit:
- Seek a short-term loan from family and friends
- Consider peer-to-peer lending from outlets like SocietyOne
- Consider approaching your bank for a personal loan
- Join a credit union, which can offer lower interest rates and more relaxed standards
There are more robust and strategic plans you can undertake to get debt help with bad credit. While the above are all options you can use for immediate relief, the paths open to you here need more deliberate consideration. It’s wise to seek financial advice for each because they’re long-term options.
However, there’s no doubt that, while they call for a longer commitment, they’re also more lasting solutions than simply getting an emergency loan to pay off another debt.
Debt Management Plans
A debt management plan recognises that entering into some form of debt to live life is almost inevitable — everything from home loans to car loans and even student loans are required for modern life.
Instead of penalising you, debt management plans analyse your whole financial picture. It’s not only about paying down your debt but also about setting up smart payments that will ensure debt is not an issue in the future, as well as setting you up with managed investments that actually protect your financial future.
Debt consolidation loans
A debt consolidation loan allows you to consolidate all your debts by rolling them into one ‘super’ debt. This consolidation shows up on your credit report — but the upside is that the interest rate on this newer, larger loan is more favourable and actually helps you pay down more principal, getting you out of debt faster.
You’re also only making one payment, which can do wonders for peace of mind and regaining financial control.
If you have equity built from a rental property or in your own home, you can seek to refinance the terms of your mortgage and seek a new loan. The refinance will help you pay down a portion of or all your debt. Now, this refinanced home loan may come with a higher interest rate than your original mortgage, especially if your credit score is considered ‘bad’.
But keep in mind that the interest rate on a refinanced loan is a secured debt — which is always much lower (even when it’s considered ‘high’) than the possible 21.99% you may be paying on your unsecured credit card debt.
The above three options are based on loans and the management of your current assets, income and financial wealth. But what if you’re facing unmanageable debt?
A Debt Agreement is the next step in personal insolvency, a path that comes with its own advantages and considerations. Rather than a consolidation loan, Debt Agreements are a legally binding contract between you and your creditors, a way to settle your debts without entering bankruptcy.
Known as a Part IX Debt Agreement, they allow you to negotiate with your creditors to pay back a percentage of your combined debt in an instalment and payment schedule that you can actually afford. These repayments are made to a debt agreement administrator.
Filing for bankruptcy is a legal declaration that you are unable to pay off your debts. Once accepted, this ‘state’ lasts for 3 years and one day. It means that your assets — such as your home — and any other property you may have, is placed in the hands of the Trustee and could possibly be sold at their discretion to recover some or all of your debts to your creditors.
However, you can use this time to start rebuilding your credit score and transform your financial situation so it is ready to go when you’re released from bankruptcy.
Consider this: If you have bad credit, getting debt help is the next logical step. And, as you can see, getting debt help is not impossible simply because you have bad credit. Everyone deserves to take their financial situation in their own hands. Use these avenues open to you and explore your options.