Personal Finance

Strategies to Consolidate Debt with Very Bad Credit (UK)

Debt consolidation is the process of combining debt from multiple sources such as credit cards, loans, utilities, and other bills into a single monthly payment. A debt consolidation loan can help you manage money and pay off your debt by giving you a lower monthly interest rate and longer time frame to pay.

In this article, we discuss some of the top ways to consolidate your debt with poor credit.

Why Even Consolidate Your Debt?

It’s an extremely useful technique for all kinds of debt, but it is most effective for high-interest debt such as credit cards. Not only that, but it also reduces your monthly payments by combining all your debts into a single debt with low interest rates.

The main benefit of debt consolidation is that it helps you keep up with multiple sources of debt by merging them into one payment. Instead of multiple payments to multiple creditors, you have one payment to a single creditor. It’s also a useful method of simplifying multiple kinds of debt into a single payment.

The traditional method for debt consolidation is to get a personal money loan. However, if you have bad credit, it can be difficult to secure a personal loan with agreeable terms. Fortunately, there are lenders out there that specialize in low-interest loans for those with poor to fair credit. There are also other methods for debt consolidation besides taking out a loan.

Credit Score

First, let’s talk about credit scores. The three most popular credit scoring agencies in the UK are Equifax, Experian, and TransUnion. Unlike countries such as the US, the UK does not really have a“universal credit score.” Rather, different agencies have different credit scores that they calculate based on your financial data. Some agencies use a 1-700 credit score rating and others might use a 1-1000 credit score rating. 

In general, the better your financial behaviour, the higher your credit score. For example, if you make debt payments on time and keep a low credit usage ratio, then you will have a higher credit score. Consequently, if you miss debt payments or use a large percentage of your total credit, your credit score will fall.

Most lenders look at credit scores to determine your financial trustworthiness. Knowing your credit score is important for figuring out how to manage your debt because credit scores determine which options are feasible. Even if your credit score is not perfect, you can still get a debt consolidation loan. 

Challenges to Consolidating Debt with a Poor Credit Score

The most significant barrier you can face to consolidating your debt with bad credit is getting approved for programs. If you have a sufficiently low credit score, some lenders will not approve any loans. However, lenders also consider other aspects of your financial history such as employment history, debt-to-asset ratio, and more, so poor credit score does not necessarily rule you out. However, if you have poor credit scores, then it is likely you will have higher interest rates on any loan you take out. 

Best Ways to Consolidate Debt with Poor Credit

There are 2 major ways to consolidate debt.

  1. Apply for a debt consolidation loan.
  2. Finding a balance transfer card with low interest

We will also talk about debt consolidation pros and cons. In some cases, both options might be open to you but for others, only one option will be feasible.

Take Out a Personal Loan

The traditional way to consolidate debts is to take out a personal loan. The amount of the loan is used to cover any outstanding debts, and then the borrower pays back the money at a lower interest rate. Taking out a debt consolidation loan is a way to combine multiple debts into a single debt. Once all your debts are paid off, you only have one payment to make each month. 

The main benefit of debt consolidation loans is that they usually offer much lower interest rates than other forms of debt, such as credit cards. Credit cards, in particular, have high interest. In the UK, the average credit card interest rate is 20.77% while the average personal loan interest is between 3.79%-8%.

Let’s attach some numbers to make these percentages tangible.

  • Say you have £10,000 in credit card debt with 18% APR and a minimum payment of 5% the total balance.
  • That comes out to a minimum payment of £500 a month.
  • It would take about 10 years to pay off that debt.

By the time you paid off that debt entirely, you will have paid nearly £5,000 extra in high interest payments. 

  • Now imagine you take out a debt consolidation loan for £10,000 at an 8% rate for 5 years.
  • That comes out to a monthly payment of just £205.
  • After the 5-year (60-month) period, you will have only paid about £2,216 in interest, less than half you would have had to pay without the loan. 

This is just an example and the actual amounts will differ depending on your credit and other facts about your financial history. The main point is that a debt consolidation loan can help you make debt payments faster and with fewer interest payments. However, if utilised poorly, debt consolidation loans can extend the period of your debt and you will end up paying more.

Before trying to get a debt consolidation loan with bad credit, make sure you have explored other options with your current lender. You could:

  • Try to make new payment arrangements with your lenders. Many credit unions will offer help with managing money from debt.
  • Make sure you are using your current credit to its full advantage, such as mortgage extensions, tapping your home equity, or any other way to get money.
  • Borrow money from family or loved ones.

If these options are unavailable, then a debt consolidation loan might be your best option. 

Secured vs Unsecured Loans

When it comes to debt consolidation loans, you have two options. 

Secured loans are obtained by putting up some assets—such as a home or car— as collateral. Under a secured loan, if the borrower cannot make payments, then the lender can take the collateral. Can loans and mortgages are the two most common kinds of secured loans but you can also get secured personal loans. You can put up a variety of assets as collateral, ranging from physical property and valuable like jewellery to investment accounts or business accounts. 

Unsecured loans, on the other hand, are not attached to any collateral. With an unsecured debt consolidation loan, lenders cannot take your possessions if you default on the loan. 

When it comes to a debt consolidation loan, secured and unsecured varieties exist. In general, it is easier to get a secured personal loan as it poses less risk to the lender. Secured loans also tend to have lower interest rates, so a secured debt consolidation loan can be an excellent choice if you have poor credit but have some valuable assets that you can put up as collateral.  Collateral normally has to match the principal loan amount and excludes amounts earned from interest. So if you apply for a £10,000 secured personal loan, you have to put up collateral that is worth at least £10,000. 

It is harder to get an unsecured loan with bad credit and they do not have as favourable terms. Since there is no collateral, the lender is taking on more risk. So, unsecured loans tend to have lower borrowing amounts and high interest rates. In the UK, the max you amount you can get from an unsecured debt consolidation loan is £25,000

Tips to Getting a Personal Consolidation Loan with Bad Credit

Here are some useful tips on how to find the right debt consolidation loan with bad credit. 

Determine your credit history. Since your credit score is the key thing that determines your loan eligibility, you should first figure out your credit score. Most lenders will have some rough guidelines on what your score has to look like to qualify for a debt consolidation loan. If you have poorer credit, then you will likely receive a higher APR. You will need to know your credit rating so you have an idea of which debt consolidation loan you are eligible for. You can check your credit rating through one of the three major agencies in the UK, as listed above.

Find the right loan term. Aside from interest rates, the loan term is the most important feature of a consolidation loan. The longer the loan term, the longer you will have to pay in interest in the long term. If the loan term is too long, then you could end up paying more in interest than you would have with your original debt. On the other hand, longer loan terms mean that your monthly payments will be less, all other things being equal. The right loan term hits an ideal balance between lowering your monthly payments and paying off your debt faster. 

Find a fixed interest rate. Many personal loans will have at least some introductory period where there is a low fixed-interest rate. As long as the interest rate stays the same, so should your monthly payments. It is much easier to pay off a loan when you know exactly how much you will be paying each month. 

Shop around and compare. As is the case with any product, it’s important to do your research to find a deal that fits your needs. Different loans have different terms and benefits, and not all will work for you. When comparing different loan deal, here are a few things to keep in mind:

  • Quoted APRs on a lender’s page are usually provisional. This representative rate will only be offered to an average of 51% of borrowers and may only apply for loans of specific amounts. So, make sure when you are looking at APRs you also look at the total loan value attached to that interest rate. 
  • Different loans have different application criteria. Make sure you know exactly which documents you need to apply to loan programs. 
  • You may have to do some deep digging. Consider calling lenders on the phone and asking questions about loan details. Don’t just go with the first few loans you find from an internet search. 
  • Consider a new bank. You might feel comfortable trying to get a loan from your current bank, but just because you are a long-time customer does not mean you will get a better deal. It might be a better option to look for a new bank that wants new customers. Lenders trying to attract new customers tend to offer better terms, like a lower APR or more flexible payment terms. 

Consider payment protection insurance (PPI). If you want extra protection, then consider shopping around for payment protection insurance. PPI will cover your loan payments if you are unable to pay because of a loss of income. As with personal loans, you should research different payment protection insurance plans to find the best one. 

Balance-Transfer Card

The other major option for consolidating existing debt is to get a balance transfer card. Balance transfer cards allow you to transfer debt from one credit card to another with a lower interest rate or more flexible payment terms. Balance transfer credit cards perform a similar function as personal consolidation loans and they are often much easier to be approved for. 

So, say you racked up a lot of debt on a high-APR credit card. With balance transfer credit cards, you can move all that debt to another card with a lower interest rate. The result is that your monthly payments will be smaller. A balance transfer card can also help you pay off your debts faster if the interest rate is sufficiently low. 

The best way to approach finding a balance transfer card is to look for one that has a 0% APR introductory period, ideally for at least a year. That way, you can be sure that all your payments are going towards paying off the principal amount rather than interest. 

Card companies offer APR-free intro periods as a way to gain new customers. That is why you usually cannot apply for a balance transfer from the same creditor. Traditional balance transfer cards normally come with a one-time transfer fee. This fee is normally about 3% of the total transferred balance. 

Balance transfer cards are generally difficult to get if you have low or poor credit. If you have significantly bad credit, you likely won’t be able to get approved for a balance-transfer card with a 0% APR period. But, even if you have bad credit, you can likely find a balance-transfer card with a lower APR intro period. It may also be possible to find a secured credit card that has a lower APR than an unsecured credit card. 

What to Look for in a Balance Transfer Card

When looking for a balance transfer card, consider the following features. 


The most important part of a balance transfer card is the interest rate. As mentioned earlier, many balance transfer cards offer a low-APR or 0%-APR introductory period. The best-case scenario is to find a card that has a 0% APR intro-period for at least 1 year. If you have extremely poor credit, you likely won’t be able to find a card with 0% APR but you can still find a card with a lower fixed-interest intro period. 

Transfer Fees

Most balance transfer cards charge a balance transfer fee. Normally, this fee is to the tune of 3%-5% of the transferred amount. So for example, if you wanted to transfer a £7,000 balance with a 5% balance transfer fee, you would be charged an extra £350. In general, transfer fees are fairly modest so they should not set you back very far unless you are transferring a very large amount of debt. 

Credit unions oftern have low balance transfer fees. Credit unions require you to apply and be approved before you can access their services though. So, if there are credit unions in your area, then they can be a soruce of finding a balance transfer card.

Payment to Creditors

Some balance transfer cards will take care of transferring the balance from one creditor to another. If you have multiple streams of credit card debt you want to consolidate, it is worth looking for a card that offers this service. Otherwise, you will have to manage transferring balances by yourself, which can be frustrating. 

Other Fees and Factors

There may be other costs and fees associated with opening a new credit card. One thing to keep in mind is that most companies perform a hard credit check when you apply which can leave a mark on your credit record. If you already have poor credit, then a hard credit check can be a bad thing. Some credit card companies will allow you to pre-qualify with a soft check that does not affect your score. You will only experience a credit hit when you actually accept the offer. 

Final Thoughts

Bad credit can be a big thing to deal with. But even with bad credit, you can still reconsolidate your debt. Personal loans and balance transfer cards are two of the most common methods of refinancing debts, but there are other options such as debt settlement. Debt consolidations remains a good strategy to manage money and you can get a debt consolidation loan with bad credit.

About author

Fully qualified CISI Investment adviser for 5 year. Managed UK private client portfolios.
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