If you're having trouble paying all your creditors each month, credit consolidation can sound like an attractive option. Companies promise to consolidate all your debts in to one monthly payment that can reduce the amount you are paying creditors while also making payment easier. If it sounds too good to be true, it usually is. Credit consolidation may reduce your monthly payments, but the facts are, it often comes at a steep price in the long run.
Impossible Terms
For those who need credit consolidation the most, money is often difficult to come by. Securing a consolidation loan through a bank, credit union or other reputable lender is contingent upon the one thing most people who have trouble paying their bills do not have -- a great credit score. The debts that are consolidated in a consolidation loan are often unsecured, meaning that all the bank or other lender has for collateral is your word you'll pay. If your credit history is littered with late payments and/or charge-offs, your word is unlikely to be enough for most creditors.
Consolidation Programs
When a bank is not an option, companies that offer debt consolidation programs can seem like the best way to pay down debt. According to an article on Bankrate.com, less than 35 percent of people who enter these programs actually benefit from them.
Debt consolidation programs may advertise themselves as "non-profit," but that does not mean they do not charge fees for their services. These fees can sometimes be steep. According to Bankrate.com, compare the minimum payments you currently pay your creditors to the payments proposed by debt programs; if the program does not save you more than 5 percent, you won't benefit.
Tricks and Scams
The Federal Trade Commission warns that many debt consolidation programs, also known as debt management plans, may not be on the up-and-up. Think twice before enrolling in consolidation programs that charge high up-front fees, do not spend adequate time reviewing your financial situation, won't send you information about their services without acquiring personal information from you, make no attempt to teach you money management skills or require that you make payments to them before your creditors agree to the program.
Credit Counseling
Working with a Better Business Bureau-listed credit consolidation company can help you to negotiate better terms with your creditors while also learning important money management skills.
Unlike credit consolidation or debt management plans, credit counseling plans help you to pay down your debt by negotiating lower payment terms and/or interest rates with your creditors. These programs also require you to learn better financial skills.
Negotiation
When a bank loan or home equity loan is out of the question, and a debt management program does not seem right for you, you may find that negotiating with your creditors can, in fact, benefit you as much or more than credit consolidation.
Many credit card companies and other lenders offer hardship programs that can temporarily -- or in some cases, permanently -- reduce the amount of your monthly payment and/or cut your interest rate. While you won't be paying one payment rather than several, the money you can potentially save may be more appealing.
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