Does Consolidating Your Credit Work?

There are several options available to individuals interested in consolidating their credit. There are pros and cons associated with every option. In deciding which consolidation program is right for you, you should consider the type of debt you have and how indebted you are. Consolidating your credit can work, that is, it can be effective in getting you out of debt. However, you must evaluate the advantages and disadvantages of all available options.

Private Credit Consolidation Companies

There are many credit consolidation companies that offer consolidation for credit card debt and other types of unsecured debt. These companies are typically for profit, as opposed to non-profit. Once you agree to enter a contract for credit consolidation with one of these companies, the company contacts your creditors to let them know you're consolidating. Typically, these companies negotiate with your creditors for lower interest rates, then you make monthly payments to the consolidation company --- usually via an automatic deduction from your bank account --- and the company is then responsible for paying each of your creditors with your monthly lump sum payment. Depending on how much debt you have, credit consolidation programs can take up to 48 months to complete, that is, until your creditors are paid off. These programs can work, but it's important to note that you must have the money for the automatic deduction on the specified date each month. Additionally, your credit score does not improve until after you've completed the program.

Consolidating Credit With a Credit Card

One option for consolidating credit it to obtain a credit card that allows for credit transfers. Usually, these credit cards offer a low interest rate for balances transferred from other credit cards. It's important to read the fine print, as some of these credit cards offer low interest rates on transferred balances for a limited amount of time. In other words, your transferred balances might be subject to a higher rate of interest after six months or one year. This option can work; however, you must be diligent about making your monthly payments. Otherwise, you could end up owing more debt than you had when you started.

Consolidating Your Credit With a Loan

For some people, obtaining a loan from a bank or a credit union --- which is then used to pay off lines of credit --- is an attractive option. This can also work, provided the loan has a lower interest rate than the credit cards being paid off. If you can acquire a loan from a bank or credit union to pay off your debt, you must make sure you use the loan for that purpose. If you don't, you'll end up saddled with more debt.

Chapter 13 Bankruptcy

Although it might seem scary to some people, filing for Chapter 13 bankruptcy is a good option. Chapter 13 bankruptcy works much like credit consolidation through a private consolidation company, but it there's less risk involved. Once you file for Chapter 13, the bankruptcy trustee notifies all creditors of your filing. You are then required to make monthly payments to the bankruptcy trustee, who takes care of the rest. In a Chapter 13 bankruptcy, creditors typically must agree to lower interest rates. Additionally, the aim is for Chapter 13 filers to be debt-free within three to four years of filing. Once the process is complete, it takes roughly two years for the bankruptcy filer's credit score to go up.