Debt consolidation is an attractive option for people who are unable to pay all of their debts each month. It is, however, a choice that should be made after weighing all the pros and cons. It may seem like a way to pay your bills and preserve your good credit, but only if you go about it the right way.
Debt Consolidation
Debt consolidation is the process of combining all of your debts into one monthly payment, thus relieving you of the burden juggling multiple bills every month. Two commons debt consolidation options are home equity and debt consolidation loans.
Debt Management
Consumer credit counseling agencies and debt management companies offer debt management programs (DMPs), which is a widely used form of debt consolidation. Debt management companies act as third-party arbitrators who contact each of your creditors on your behalf to work out a suitable monthly payment plan. The creditors agree to lower interest rates and waive late and over-the-limit fees. You send one single payment to the DMP who then sends a payment to each of the creditors. Once the DMP is in place, you are instructed to refer any calls from your creditors to the DMP.
Effects
There is the possibility that a future creditor may look adversely at a DMP on your report; however, debt consolidation alone will not ruin your credit as long as you maintain timely payments. Closing your accounts once they are paid off could impact your credit score. Should you decide to close accounts, close the newer ones. Send your creditors a letter requesting that the account be reported as closed at your request rather than the creditors'. This looks better to future creditors.
Warning
If a debt management company delays sending payment to your creditors while they are negotiating a payment plan, the payment is reported to the credit reporting agencies as late. Some creditors accept the DMP but refuse to change their due dates--and the DMP may not tell you this, resulting in late payment being reported despite your timely payment to the DMP. Late fees will continue as well. Some creditors may still call you about the debt, stating that the agreement you signed was with them, not the DMP.
Considerations
Debt consolidation is not for everyone. If you are not paying your bills on time, you may not qualify for the lower interest rate a DMP could negotiate on your behalf. Depending on the amount of monthly debt, you may end up paying a DMP more than if you managed the debts on your own. If you choose to get a home equity or debt consolidation loan to pay off debt, make sure you can afford the monthly loan payment. These are points to keep in mind when considering debt consolidation.
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