Learn the basics of debt consolidation
Important facts about debt consolidation
The ads and pitches for debt consolidation services are everywhere. Unfortunately, misinformation about these services is just as prevalent. Here are the facts you can't do without:
- Credit counseling and debt management programs aren't synonymous. Credit counseling is centered on education. It helps teach the consumer how to pay bills and manage debt until he or she is out of the red. Debt management programs, on the other hand, are just one way among many that a credit counseling company can render its services.
- Lenders advertise teaser rates for consolidation services such as home equity loans, balance transfer credit cards and debt consolidation loans. Keep in mind that prime rates are reserved for those with prime credit, and any too-good-to-be-true rate is often only available for a very limited time.
- Debt management programs don't allow room for negotiation. Any credit counselors who tout negotiation are probably referring to debt settlement instead. Debt settlement can ruin your credit as debt settlement representatives withhold loan payments to get creditors' attention, and then proceed to negotiate repaying the balance with cents on the dollar.
- Consolidating debt through a program isn't a wise choice for most people, and getting out of debt doesn't require a formal program in any case. You could apply for a debt consolidation loan without help from a conventional bank, for instance.
- Consolidating debt is hardly a money saver. Many consumers fall prey to the bait and switch. You're promised a fee-free deal, but a simple misstep could be costly and fees can run up quickly.
- If you have great credit, a debt management program could run it into the ground. But, if you're already delinquent and that's reflected on your credit report, these programs could help as lenders see that you're taking control of your debt situation.
Whether you opt into consolidating your debt, any real solution for your debt problems won't be an overnight fix. The road you choose will require commitment.