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Best Debt Consolidation Options for Poor Credit

by Jackie Lam on
11/8/2024
in Repaying Debt
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The following article is presented for informational purposes only and is not intended as credit repair.

If you’re struggling with debt, you may have considered debt consolidation. Debt consolidation lumps all your high-interest debt, such as outstanding credit card balances, personal loans and medical bills, into one lower-interest monthly payment.

Here’s the thing: debt consolidation loans, home equity loans, and even balance transfers to a new card typically require that you have a solid credit score. If you're struggling and your credit has taken a hit from missed payments, you may not qualify for any of these options. 

Fortunately, even if you have less than stellar credit, you have options for consolidating your debts. 

Debt settlement

If your credit is poor because you've missed multiple payments and your debts are severely delinquent (or possibly even charged off) then you may want to consider consolidating your debts with a debt settlement or debt resolution plan.

Settlement is typically reserved for consumers with accounts that are already in the collections process. It's not a loan, so there's no credit requirement.

Settlement itself isn't a form of consolidation, but if you work with a third party settlement company, they'll work with you to create a plan that brings all of your debts together into a single payment.

How settlement consolidates your debts

If you decide to pursue a debt settlement plan, you'll start making monthly payments to the company managing your settlement. This is the only payment you'll be making (you'll stop paying your creditors directly).

The settlement company will bank the money you send them and begin negotiating with your creditors. Their goal is to get your creditors to agree to a partial repayment of your total debt. Once an agreement is reached, the settlement company will begin using the funds that you've banked to make the agreed upon pay off to the creditors. 

Although your debts aren't paid in full, they'll be considered "paid off" once the agreed upon payments have been received and you won't need to make up the remaining balance.

When to use debt settlement

Because a debt settlement means you're paying less than you owe, it can often be the most affordable way to get out of credit. If your credit is poor and you can't afford other methods of repayment, a settlement plan can make a lot of sense.

Keep in mind that if your credit is okay (better than poor) a settlement can do serious damage to your credit. Because of this, it's recommended that you only pursue settlement if credit is already in bad shape or you absolutely cannot afford other available options. 

Debt management plans

If you're looking for the benefits of a consolidation loan, but worried that you don't have the credit to qualify, you're in luck. You can consolidate your debt without a loan by using a debt management plan (DMP). A DMP is a structured repayment plan usually facilitated by a nonprofit credit counseling agency.

With a DMP, your interest rates are lowered, creating a more affordable payment and helping to save you a lot of money, while still getting the credit benefit of repaying your debts in full.

How a debt management plan consolidates your debts

Working with a nonprofit counselor, you'll create a repayment plan that usually includes substantial interest rate reductions from your creditors. You make one budget-friendly payment to the plan manager, who then makes payments on your behalf to all of your creditors. DMPs are typically designed to have you out of debt within three to five years.

There's no credit requirement, and unlike a debt consolidation loan, you can cancel a DMP at any time if you don't feel like the plan is working for you.

When to use a debt management plan to consolidate debt

Debt management plans are ideal for consumers who are struggling with their current credit card payments. There's no credit requirement and you may still qualify even if your debts are currently delinquent. 

Besides being more affordable than making payments on your own, DMP clients will often see a significant credit score improvement during the course of the program thanks to the consistent, timely monthly payments. 

These programs usually have lower fees than if you consolidated via a loan through a bank. Plus, if you start a DMP through a nonprofit credit counseling agency, you’ll also receive debt counseling and access to additional financial education, which can help prevent your issues with debt from reoccurring.   

MMI offers free financial counseling 24/7, online and over the phone. Working with a nonprofit counselor, you can discover all available options and find the one that best fits your circumstances and goals.

Tagged in Debt strategies, Debt settlement

A corporate headshot of Jackie Lam.

Jackie Lam is an L.A.-based personal finance writer who is passionate about helping creatives with their finances. Her work has appeared in Forbes, Mental Floss, Business Insider, and Bankrate. She's also a 2022 Financial Literacy and Education in Communities (FLEC) award winner. You can find her at heyfreelancer.com.

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