The causes of financial crisis can range from overspending to medical bills to the loss of a job. Whatever the cause, credit and debt consolidation is one of several solutions available to help you gain control over your financial situation. While it is not appropriate for everyone, credit and debt consolidation is a good option for those committed to sticking to a budget and refraining from credit card use.
How Consolidation Programs Work
When an individual decides to use a credit and debt consolidation program, she acquires a loan for the amount of debt she needs to pay. Then, instead of making several payments to different creditors, the debtor makes just one payment to the lending institution that gave her the large loan. The term "credit consolidation" is used interchangeably with the term "credit card consolidation," which combines credit card debts. Debt consolidation programs can combine a variety of different debts, such as medical debts or personal loans, into one. Therefore, credit and debt consolidation programs help an individual pay off a variety of debts by combining them and charging the debtor with one debt payment per month.
In addition to using a debt and credit consolidation program, the Federal Trade Commission (FTC) states that some choose to consolidate debts through a home equity line of credit or a second mortgage. While credit and debt consolidation loan programs offer unsecured loans and advertise lower interest rates, they cannot guarantee this. A second mortgage and home equity line of credit are secured loans that generally do charge low interest rates and may offer tax credits, but also charge points -- one point equals 1 percent of the amount borrowed. The FTC states that delinquency on secured loans can cost an individual her home, as this is the collateral.
Protecting Yourself
The FTC warns that there are credit and debt consolidation programs that do not always have a customer's best interest in mind. Before signing any contracts with such a program, learn about all the fees associated with the program. A program may also ask you for "voluntary contributions," which is another term for fees. Be wary of credit and debt consolidation programs that state they are part of a new government bailout program, promise to make your unsecured debts, collection agency calls and lawsuits disappear, and tell you to communicate with your creditors no more. A good credit and debt consolidation program will not make promises to charge you interest rates that are pennies on the dollar, will send you free program information and will take the time to review your financial situation before signing you up for its program. Additionally, a legitimate debt consolidation program should not charge you any fees before it accepts you into its program.
Managing the Symptoms
A credit and debt consolidation program is most effective for those who know how to budget and have good money management skills. Ideally, consolidation programs should offer this as a service, but some do not. According to financial adviser Dave Ramsey, when an individual enrolls in a credit consolidation program that does not teach about money management skills and budgeting, he only masks the symptoms of a spending problem that leads to large amounts of debt. Instead of taking care of the spending problem, an individual just transfers his debt to a new creditor without consideration for a debt elimination plan. Consequently, according to Ramsey, it is common for these individuals to accumulate new credit card debts and, consequently, obtain lower credit scores.
Credit Rating
A credit and debt consolidation program can hurt or improve your credit rating. Lending Tree states that if the consolidation program negotiates a settlement with your creditors for an amount that is less than what you originally owed, your credit report may state that you did not repay all the money you promised. Your credit score can also drop if a consolidation program does not repay your creditors on your behalf on time. A good credit and debt consolidation program should help you raise your credit score.
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