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Is a debt consolidation program right for you? Find out how it’s different from other consolidation methods.
Debt consolidation involves rolling all your debt into one monthly payment. You can do this in a few different ways:
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.
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.
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.
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.
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 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.
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.
If you have outstanding medical debt, you may also be able to pay that off through a debt consolidation program.
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.
A secured loan, such as a home equity loan, cannot be enrolled in a debt consolidation program. Unsecured personal loans often can.
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.
Here are the steps involved in enrolling:
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.
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.
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.
Now, all you have to worry about is making the monthly payments to your credit counseling agency.
Before starting, it’s important to understand the financial consequences.
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.
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.
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.
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.
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 Debt.com to find the best debt relief company for you.
Article last modified on August 15, 2019. Published by Debt.com, LLC