Is it Wise to Use a Credit Consolidation Company to Get Out of Debt?

The commercials make working with a credit consolidation company seem so simple, but placing your trust (and debt) with a third-party agency is not quite the magic bullet it may seem. While there are many credible credit counselors on the market, you still need to understand the terms, risks and rewards.

Benefits of Using Credit Consolidation Companies

Credit consolidation companies offer you the convenience of a lump-sum payment at a lower interest rate. These companies can cut your monthly payments by substantial amounts and offer to manage your debt, paying the card companies directly while, in some cases, drawing directly from your bank account. You will not have to juggle various debt payments and, instead, just deal with that one payment. While that process may be convenient and seem an easy way to eliminate the debt that keeps piling-up, be aware there are costs to the service.

Cost of Using Credit Consolidation Companies

You managed to put all of your high-interest credit card debt into one neat pile, with a lower monthly cost to you. However, doing business with a credit consolidation company does have its cost. Managing all your bills is typically not a free service. In a typical consolidation agreement, the company builds-in a service fee as part of the monthly payment. In return, the company will negotiate lower-interest rates with your debtors and an extension of terms. You could do this yourself, though, by asking. While your monthly payment will be lowered, the time it will take to pay off your bills will often be stretched for a longer period---extending the time you could have paid off the bills on your own.

Alternative Lending

Though credit consolidation firms seem like a convenient fix, there are options that are less costly. If you have even decent credit and are a homeowner, you can find a home equity loan that may not be quite as low as the consolidation firm's number, but reasonable enough to consolidate that debt into a sum that is both affordable and can be paid down in a reasonable amount of time. Fees are also associated with the origination of these loans but, in most cases, they are not nearly as cumbersome as credit consolidation company fees. You can also consolidate your high-interest debt into a lower-interest credit card. To preserve your credit score, you'll want to keep the cards open but only use the lower-interest card for purchase and balance transfers. You'll lower your monthly bills and decrease your time in debt. Be cautioned, though, not to transfer balances to a card offering a promotional rate unless you can pay off the amount in the time allotted.

Doing It Yourself

Of course, you could opt to reduce your debt on your own. The idea is to simply cut back on your variable spending habits that got you into debt in the first place and take the savings to make an extra payment. The preferred method would be to take the debt with highest-interest first, but you can always start with a smaller amount so you can celebrate when you pay-off your debtors, one at a time.