Bill consolidation and debt management programs are two options you may consider when researching methods to eliminate your debt. They are radically different choices, and each involves a different type of management style to get you to financial freedom. It's important to understand how each method impacts your credit rating and what you must do to use each successfully.
Bill Consolidation
Bill consolidation also is commonly called debt consolidation. The two terms refer to the process of combining multiple debts under a single new loan. The biggest benefit to using debt consolidation is convenience -- instead of keeping track of numerous bill due dates and payments each month, you need to make only one payment. In some instances, you can save money by using debt consolidation if you secure a loan with a lower interest rate than you have on your existing debts.
Debt Management Program
A debt management program (DMP) is a scheduled payment plan put in place by a credit counselor. You must be approved for a DMP by a credit counselor. After approval, your credit counselor contacts your creditors to negotiate lower interest rates or payoff balances, then puts together a time frame for your payments. Most DMPs last for three to five years, at the end of which your debt is paid off. Some companies that offer DMP services require fees.
Warnings
Debt consolidation is a risky option for those who have issues with overspending. When you take on a debt consolidation loan, nothing is preventing you from using the available credit you created on a credit card by transferring the card's existing debt to the new loan. You could end up with more debt if you aren't dedicated to using the loan to become debt-free. Debt management plans don't open you up to more debt, and they have the added benefit of being part of a credit counseling program, which means you'll get help creating a budget so that you don't end up in debt again. The drawback to using a DMP is that it could affect your credit rating. If you pay less than the amount you originally owed -- even if a lower payment was negotiated with the creditor -- your credit score is negatively affected, and it could make it difficult to obtain new credit.
Considerations
A debt consolidation loan will positively impact your credit score by raising your available credit, but the loan application will hurt your score slightly. Also, if you fall further into debt because you use the loan irresponsibly, you could damage your score more. Before applying for a debt consolidation loan, ask about the range of interest rates for which you are likely to qualify. The advertised rates are generally reserved for those with excellent credit scores, and the interest rate for which you qualify may be no better than the interest rates on your existing loans. If that is the case, it may not make sense to take on the risk of additional debt.
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