Debt consolidation pertains to the process of refinancing your high-interest debts into one, lower-interest payment. By doing so, you will reduce the total amount of debt you owe, helping you to repay these outstanding balances in less time. Depending on your financial needs and goals, debt consolidation companies may provide you with the option to transfer your debts to a fixed-rate consolidation loan or a balance-transfer credit card.
If the total amount of your owed debt (excluding your mortgage) exceeds 40 percent of your income, settling your debts with the help of a reputable consolidation company may be a better solution for you. National Debt Relief is just one type of company that can help you to reduce the amount of debt you owe while avoiding the need to take out additional loans or file for bankruptcy.
How does debt consolidation work?
Debt consolidation is done by combining your smaller debts into one single loan. Depending on your situation and whether this type of program is right for you, consolidating your debts into one lower-interest payment can help you to simplify your finances, repay your debts in less time and lower the amount of money you owe each month.
Moreover, using debt consolidation loans bad credit may not be a good idea unless you have a credit score of 580 or higher. In most cases, having a poor credit score of less than 580 will limit your ability to obtain a new loan. As an alternative to consolidating your debts, you may choose to:
- Use a debt consolidation plan.
- File for bankruptcy.
- Create a budget to help you better manage your finances.
Furthermore, debt settlement is another type of method you may wish to consider as an alternative to consolidating your loans. However, settling your debts could harm your credit score and it could take several years to reach a settlement with each of your creditors.
Types of Debt Consolidation
Once you familiarize yourself with the debt consolidation definition and the pros and cons of consolidating your outstanding payments, it is important to consider the different types of methods that can be used. These include:
- Credit card balance transfers. With a balance-transfer credit card, you can transfer your outstanding debts onto a single credit card. After doing so, you will receive a zero-percent interest rate for a promotional period of least six months. If you do not repay the full balance before the end of the promotional period, however, your interest rate and monthly payments will increase.
- Debt consolidation loans. With this type of loan, you use the money you borrow from a bank, credit union or another type of financial institution to repay your outstanding debts. While you can get low debt consolidation loan rates if you have good credit, these rates will typically only last for a limited period of time.
Additional consolidation options are also available, including home equity loans and 401(k) loans. However, these two options are riskier than those listed above. With a home equity loan, for instance, you could lose your home if you fail to repay the full amount of the loan.
Is a debt consolidation company worth it?
While many debt consolidation companies such as National Debt Relief are available to assist you if you wish to consolidate or settle your debts, it is important to understand whether the company will consolidate your loans or attempt to settle them with your creditors. In most cases, settlements are riskier than loan consolidations and should only be used as a last resort.
If you wish to consolidate your loans instead of reaching a settlement, you may complete this process on your own by applying for a balance transfer credit card or consolidation loan.
“Is debt consolidation a good idea?” is a question you may have when considering the possibility of consolidating your loans. Typically, consolidating your loans into one payment may be a good idea if the following statements are true:
- You have good credit
- You qualify for a low-interest credit card balance transfer or
- The total amount of your debts does not exceed 40 percent of your gross income (excluding your mortgage payment amount)
Using an online debt consolidation calculator can help you to determine whether consolidating your loans into one monthly payment is the right decision for you. To get the most accurate results, however, you must provide as much information as possible about the debts you are struggling to pay, such as the amount of your outstanding balances and interest rates.
Debt Consolidation Programs
Companies such as Freedom Debt Relief and National Debt Relief can help you to settle your debts with creditors if you wish to reduce the amount of debt you owe rather than consolidating them into one monthly payment. Settlements and consolidations are not the same thing, and it is important to understand the differences between these two methods.
When you settle your debts, you negotiate with creditors to see if they will accept a lower amount than you originally owed. If you owe $15,000, for instance, the creditor may agree to accept a lump-sum payment of $10,000 to settle the debt. In other cases, you may be able to make multiple payments rather than one lump-sum.
However, debt consolidation can be detrimental to your credit score and history. A creditor will not generally accept a settlement arrangement unless the creditor (or collection agency) believes that you will not be able to repay the full amount of your debt. Thus, an account must typically fall into default or be handed off to a collection agency before debt settlement becomes an option.
Your credit score will not only be affected by the missed payments and the default status of your accounts, but the settlement will be noted on your credit history, signifying that you were unable to repay your entire debt. This information can remain on your credit history and impact your score for up to seven years.
On the other hand, debt consolidation does not generally harm your credit score as you will be paying the full amount of each debt. So long as you pay your balances in full and you make timely payments on your consolidation loan or card, your credit score may actually increase.
Credit Counseling Resources
- State Consumer Protection Offices
- What to Know About Filing for Bankruptcy
- Approved Credit Counseling Agencies by State
Debt Relief Programs Explained
As part of a settlement program, you or another representative negotiates with a creditor to lower the amount of money you owe in outstanding debts. However, you typically need to stop making payments to the creditor as you attempt to save up enough money for the settlement, and the creditor may charge you late fees and other penalties during this time.
Moreover, debt settlement relief programs cannot guarantee settlements with creditors, and you may face delinquent fees and tax consequences when you attempt to settle your debts. Additionally, it can take several months or years to reach a settlement with a creditor.
While debt consolidation for bad credit is not advised, you may choose to settle a debt with a creditor if your account is already delinquent. Settling your debts can harm your credit, but there is less of a risk if your credit is already poor. Unlike consolidation loans and credit cards, you do not need to meet credit requirements in order to settle a debt.
Companies That Help with Debt Settlement
While many companies are available to assist you if you wish to reduce the amount of debt you owe, not all of them are trustworthy. Several trusted companies include:
- Freedom Debt Relief. Since 2002, the company has helped to resolve more than $10 billion in unsecured debt. Unsecured debt includes debt from credit cards, medical bills, personal loans, department store credit cards and private student loans.
- National Debt Relief. With an A+rating from the Better Business Bureau (BBB), this company has helped consumers to settle their debts since 2008. However, you must owe at least $7,500 in debt in order to qualify for the services it provides.
Before deciding whether to work with a settlement company, it is important to do plenty of research. For instance, Freedom Debt and National Debt Relief reviews and customer testimonials can help you to determine whether professional representation is right for you.
Steps That Debt Consolidation Companies Take to Lower Your Debt
You may be wondering, “How does debt consolidation work if I wish to reach a settlement with a creditor?” While the process of settling a debt may vary depending on the relief company you hire to represent you, common phases include the following:
- Building a savings account that will be used to settle the amount of your debts
- Negotiating with creditors to reduce the amount of money you owe
- Authorizing the settlement between you and the creditor
- Paying the full amount of the settlement
While you may feel comfortable settling your debts without obtaining professional assistance, a consolidation company will continue to negotiate on your behalf, even if the creditor does not agree to a settlement. However, it is important to remember that a debt settlement is not always possible, and some lenders may refuse to accept settlements from consolidation companies.
Download Free Useful Templates for Debt Management:
- Debt Reduction Calculator
- Credit Repair Spreadsheet
- Credit Card Log
- Credit Card Payoff Calculator
- Mortgage Loan Calculator
- Credit Card Tracker
What to Look for in a Debt Consolidation Loan or Balance Transfer Card
Before applying for a consolidation loan or a balance transfer card, it is essential you know the key factors that you should look for to get the best card or loan for you.
You may be able to save money while repaying your debts if you are able to find a card or loan with an interest rate that is lower than that of your existing debts. Additionally, it is crucial that you review whether or not you have a balance transfer fee that must be paid in addition to your loan amount.
Finally, if you intend to get a balance transfer card, you must review the introductory period. Balance transfer cards commonly include an introductory period where interest rates are 0 percent or very low. However, after the intro period, these rates typically increase substantially. If you are unable to repay your full amount of debt before your rate increases, you could actually end up paying more towards your debt than you would have otherwise.