The 4 Questions To Ask Creditors When Consolidating Your Debt
Trustworthy Debt Consolidation Providers and Accreditation
Debt consolidation is often overlooked when seeking solutions to debt problems. The most recent Federal Reserve statistics show that the average household debt in the first quarter of 2015 is slightly lower than in 2009 and 2010. What has contributed to the decline? Many heavily-indebted consumers turn to bankruptcies and debt settlement to reduce or eliminate their financial obligations. However, these options are not for everyone.
What is debt consolidation?
Debt consolidation, may also be called debt management, is an alternative to bankruptcy and debt settlement. It allows a consumer to combine his bills into one monthly payment to a third-party agency. The payment amount is set between two and three percent of the total outstanding debt.
How does it work?
Debt consolidation agencies negotiate agreements with banks and financial organizations to help consumers with debt repayment. When a debtor is struggling to make on-time payments, his credit card interest rate goes up and financial charges start adding up. As a result, the larger portion of his payment is applied to cover the charges. The agency is able to reduce or even eliminate accrued financial charges and lower the rate, so that the payment goes to repay the principal. The agency distributes the debtor's money to the creditors each month until all debts are paid in full.
Is debt consolidation for everyone?
Certainly, not. Debt consolidation works well for those with unsecured consumer debt, such as credit cards, charge cards, and personal loans. Since secured loans are not accepted into debt consolidation programs, it will not benefit debtors with student loans, child support and alimony debt.
Is debt consolidation the same as debt settlement or bankruptcy?
No, when consolidating debt, the debtor is repaying 100 percent of his financial obligations. In debt settlements, lenders forgive part or the whole debt. When a consumer files bankruptcy, his unsecured debts are partially or completely eliminated.
Does debt consolidation affect credit scores?
While debt consolidation will not damage a consumer's credit score like bankruptcy for 10 years, it certainly may have a negative effect on it. Lenders may note that payments are made through a debt consolidation agency. A creditor may be reluctant to open a new loan while the debtor is in the program.
Is there a fee for consolidating debt?
Debt consolidating companies may charge a small fee for their services. A fee can be a percent of the total debt amount or a set amount included in the monthly payment.
How do I find a reputable debt consolidation agency?
Before contacting a debt consolidation agency, you should check their rating through the Better Business Bureau. A high rating, such as A+, means that the agency has had no consumer complaints in the past. A lower rating, such as B, C, D, or F, indicates that there may have been some issues in the past which have or have not been resolved. You may also ask for a referral from a credit counselor. They usually have a list of reputable debt consolidating agencies.
Debt consolidation can be a good solution for many consumers who are struggling with debt repayment. If you find yourself falling behind on your payments, check with a credit counselor if debt consolidation is a good option for you to get back on track with your financial obligations.