Credit card debt consolidation is often a desirable solution to carrying balances on multiple credit cards, some of which may apply high annual percentage rates (APRs). However, many of the options available to those with good credit---rolling the debts over into a single credit card with a low APR or taking out an unsecured loan with a low interest rate---aren't available to those with a poor credit history. Before you consolidate credit card debt with bad credit, be sure to know your options and the risks involved in taking on additional debt.
Step 1
First, stop using your credit cards---cut them all up, advises Suze Orman. You may want to keep one credit card account, but don't carry the card in your wallet, and use it only for emergencies. Regardless, if you choose debt consolidation or another method of getting rid of credit card debt, increasing the balance on your credit card accounts is counterproductive to your efforts.
Step 2
Use your home as collateral. If you have bad credit but have been able to hang on to your real property, one way to consolidate debt is to take out a second mortgage or use your home equity as a line of credit. This gives you the advantage of deducting the interest on the loan when tax time rolls around---and you may be able to get lower interest rates on refinancing or a home equity loan. However, the Federal Trade Commission warns you that this places your home at risk; if you're unable to pay back the loan or if you make slow payments, you can face foreclosure.
Step 3
Ask a family member or friend to give you a loan so you can consolidate credit card debt. Credit.com notes that this can be a win-win situation. You get a lower interest rate, and your family member or friend makes a little money off the loan. But if you default on this personal loan, it can cause a rift between you and your loved one. You may also end up paying taxes on the unpaid loan, and sometimes the Internal Revenue Service will tap your friend or family member for taxes on below-market interest rates.
Step 4
Apply for an unsecured loan at a lending institution, but don't expect miracles. Unsecured loans generally aren't offered to consumers who carry a heavy credit card debt load, and if they are, they come with a high interest rate. According to MSN Money's Liz Pulliam Weston, those with good credit can get an unsecured loan at a decent interest rate--around 15 percent. But if you have a lot of credit card debt with bad credit, you might get an offer of 18 percent to 21 percent or even higher, as well as have to pay upfront fees of up to 10 percent of the amount of the loan.
Step 5
Consider a different type of debt consolidation---a debt management program (DMP). DMPs are administered by reputable credit counseling organizations and are a more attractive option to credit consolidation, since it doesn't require you to take out a loan. You are required to deposit a specified amount of money with the organization each month, and the credit counselor then pays your credit card debts for you. Additionally, credit counseling agencies may be able to negotiate lower interest rates with some creditors. To find a reputable credit counseling agency that can assist you with a DMP, locate a member agency of the National Foundation for Credit Counseling that's closest to you (see Resources).
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