Debt consolidation is a money management tool designed to help consumers pay down and eliminate debt. According to the American Consumer Credit Counseling Agency, a debt management program can have an adverse effect on a consumer's credit score initially. Over time, however, the credit score will generally improve.
Process
Debt consolidation programs are not designed to improve credit, although an increased credit rating can be the result of proper money management. Consumers enroll in debt consolidation programs by providing consolidation companies with their budget and credit information. The companies then contact and work with creditors on the consumers' behalf.
Advantages
Debt consolidation programs help consumers manage and eliminate debt over time. One of the biggest advantages of enrolling in a debt consolidation program is that it allows debtors to pay many if not all of their financial obligations in one large lump sum every month. Delinquent accounts are often reaged, meaning they will show current on the consumer's credit report, boosting the credit score over time.
Drawbacks
Debt consolidation programs can appear negatively on your credit report. According to Money Management International, "if your budget does not permit you to pay full payments, for a period of time some of your creditors might report you are not paying as originally agreed."
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