Debt Consolidation – When and How to Consolidate – Part I

Welcome back and congratulations to you if you read my previous post “How to Reduce Your Debt” and implemented your plan to reduce your credit card balances! Keep up the good work and before you know it, you will see the debt decrease and finally disappear.

Another way to manage your expenses is to consolidate your bills. In this blog I will provide some pointers and things to consider when thinking about consolidating.  The information is vast and varies upon one’s financial circumstances. Since we are all different, I will split the recommend options between this post and next week’s Part II blog. This issue will address options for those that don’t have strong credit ratings. Next week I will provide advice for those that have strong credit ratings.

Debt Consolidation is the practice to achieve one or more of the following goals: getting out of debt as soon as you can, significantly lowering your interest rate, reducing the number of creditors that you have to deal with every month or getting creditors off your back. You should prioritize these goals in the order from most important to lease important. In addition, be sure to check your credit report before you take action and after you have completed any program to monitor and compare your status.

There are two main ways to consolidate your bills when your credit rating is not so favorable. They are:

  1. Credit Counseling – This is a program set up in partnership with a debt management company that you select for the purpose of speeding up the time it will take for you to get out of debt. Generally the debt manager will negotiate a lower interest rate with your creditors. In exchange, you make one payment to the debt manager and they send payments to all the creditors every month on your behalf. Wouldn’t that be a good feeling?  In most cases you pay back all that you owe but usually do it faster because more of your money is being applied to the principal balance as a result of the lower interest rate. You do pay a program fee to the management company for this service.  Many non-profits offer credit counseling services. Be sure to check the company you ask to help you. As you can imagine, credit counselors, like predatory lenders, prey on the most vulnerable among us. Check out the company with the Better Business Bureau and check internet reviews on a site like www.ripoffreport.com to be sure the company you’re dealing with is reputable.
  2. Debt Settlement – If you have unsecured debt, like from credit cards or “Signature Loans” and are in a hardship position, then debt settlement is an option to consider.  Through negotiations, you or a settlement company reaches an agreement with a creditor to decrease the amount that is owed to them. As a result, your monthly payments should be significantly lower than your current monthly payments. This option has a stronger negative effect on your credit score over the credit counseling option above.

Depending on your priorities, you may select one over the other. For example, if not having creditors calling you regularly and/or you are concerned with your credit then the best option would be credit counseling. However, if your goal is to get out of debt as quickly as possible and at the lowest cost then debt settlement may be a better choice.

Before making a decision, you must shop around and speak with different debt counselors and settlement companies about their programs. Learn what their fees and success ratios are. Ask for referrals and check the Better Business Bureau to see what kind of complaints, if any, are out there. As a word of caution, try to avoid any up-front fees.

Stayed tuned for next week’s blog Part II where I share tips and options on how to consolidate your debt when the credit rating is strong!


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