Debt consolidation involves rolling all your debt into one monthly payment. You can do this in a few different ways:

debt consolidation program; credit cards and past due bills

  • Balance transfer: To consolidate your debt with a balance transfer credit card, you combine all your credit card balances onto one balance transfer card, so individual interest rates don’t apply.
  • Debt consolidation loan: You can take out a personal loan to pay off all your debts at once, thereby consolidating your debts into one monthly payment on the consolidation loan itself.
  • Debt consolidation program, commonly called a debt management program: Working with a credit counseling agency, a credit counselor leads you through a program to pay off all your debt through one monthly payment to the agency instead of making payments to your various creditors.

Both balance transfers and debt consolidation loans are considered new financing methods of debt consolidation. This means you are opening a new line of credit to consolidate the accounts you currently have.

A debt consolidation program is different. There is no new line of credit. Instead, it’s a professionally assisted repayment plan that you enroll in through a credit counseling agency.

If you can’t consolidate on your own because you have too much debt or bad credit, then a consolidation program may be the answer.

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Debt consolidation program vs. balance transfer

Balance transfers don’t work for everyone. Sometimes, your balance is just too large to transfer and pay off before the 0% APR introductory rate on the card expires. Maybe you don’t want to deal with the fees associated with transferring your balance, which can be up to 3% of each balance transferred. Or perhaps you just don’t trust yourself not to spend even more and make your debt worse.

Debt consolidation program vs. consolidation loan

Consolidation loans, like balance transfers, are best for those who can control their excessive spending while making their monthly payments. If your amount of debt is too high or you need help reining in your spending, a debt consolidation program may be the better choice for your situation.

How is debt consolidation different from debt settlement?

People often talk about consolidation and settlement like they are one and the same. However, they are very different and will have very different effects on your finances. A consolidation program pays back everything you owe to minimize any potential credit damage. A settlement program pays back a only portion of what you owe, but your credit takes a hit for each debt settled.

What kinds of debt can I get rid of in a debt consolidation program?

Including debts in a debt consolidation program is always contingent on the agreement of the original creditor, lender or collector that holds the debt. The companies you owe must agree to allow you to include their account in your consolidation program. These are the types of debt you may be able to include:

Credit card debt

Credit card debt is the most common type of debt entered into a debt consolidation program. Most credit card companies have established relationships with credit counseling agencies, so they generally readily agree to allow you to include these accounts. You can combine multiple credit card bills this way, so you aren’t struggling with the varying insurance rates.

Debt collections

You may also be able to get rid of bills in collections through a debt consolidation program. You won’t have to deal with collectors anymore.

Medical bills

If you have outstanding medical debt, you may also be able to pay that off through a debt consolidation program.

Payday loans

Did you take out some short-term, high-interest loans that you couldn’t afford? You may be able to work toward paying them off in full by adding them to your debt consolidation program.

Unsecured debt – personal loans

A secured loan, such as a home equity loan, cannot be enrolled in a debt consolidation program. Unsecured personal loans often can.

Credit card debt consolidation loans

Some people try to consolidate their credit cards or other debts on their own and it doesn’t go very well. Debt consolidation programs may also help you pay off these loans.

Discover how these different methods of consolidation will affect your personal finances.

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How It Works

Here are the steps involved in enrolling:

debt consolidation program; hand reaching out of pile of debt papers

Call a credit counseling agency.

There are two kinds of credit counseling agencies: for-profit and nonprofit. Both may help you reach your goal and eliminate debt, but many people like working with a nonprofit credit counseling agency because they don’t rely on enrollments for money.

Get help deciding what the best debt relief solution is for you.

When you call a credit counseling agency, you will talk to a certified credit counselor that helps you explore different options for debt relief. You could discuss everything from balance transfers to debt settlement.

A debt consolidation program, which they will likely call a debt management program, could be a great fit for your situation. If it is, they will help you enroll.

Enroll in a debt consolidation program.

When you enroll in a debt consolidation program, you begin by consolidating debt accounts through the credit counseling agency you work with. Be aware that creditors will freeze your credit accounts during this time, ensuring that you don’t incur any extra debt on top of what you are paying off.

Make monthly payments to the credit counseling agency.

Now, all you have to worry about is making the monthly payments to your credit counseling agency.

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How a debt consolidation program affects your finances

Before starting, it’s important to understand the financial consequences.

Credit scores

A consolidation program, or debt management program, can actually be good for your credit score. Your scores may drop initially. However, debt consolidation is usually the best method of debt relief if you want to maintain or increase your credit scores.

Credit accounts

Usually, the credit accounts you enroll into the debt consolidation program will be closed once they’re paid off. You also won’t be able to apply for new credit accounts while you’re enrolled. However, you can still apply for secured loans, such as auto loans.

Should I use a debt consolidation program if I have…

Good Credit?

If you have good credit, a debt consolidation program could be the ideal choice. It doesn’t affect your credit scores and credit reports as negatively as other methods of debt relief.

Bad Credit?

If you already have bad credit, you owe a large sum of money that you don’t think you can pay back, and you are willing to see your credit scores drop even further if it means debt relief, working with debt settlement companies may be a better option for you. A debt consolidation program is great for those wanting to preserve their credit scores and save money. However, if you don’t have a credit score worth preserving, settling your debt for less could be the best choice.

Final Thoughts

Still struggling to pay off your debt? In a debt consolidation program, also known as a debt management program, you won’t take out new financing that could severely damage your credit scores. Instead, you can preserve a good credit score and work with a credit counselor to pay off everything you owe. You may even be able to reduce your monthly payments.

Especially if you feel like you have too much debt to consolidate on your own, consider a debt consolidation program. Start by working with to find the best debt relief company for you.

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Article last modified on June 1, 2020. Published by, LLC

Reviewed By

Howard Dvorkin, CPA

CPA and Chairman