Your Comprehensive Guide to Debt Consolidation

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 together your smaller debts so you only are responsible for paying one entity each month. There are two main ways you can consolidate your debt. You can do this with a loan or low-interest credit card.

Depending on your situation, 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.

However, keep in mind that debt relief isn’t for everyone. In fact, some people will not be able to take advantage of this option because their credit scores are too low. In most cases, you won’t be able to take out a new low-interest credit card unless you have a relatively healthy credit score.

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.

Is debt consolidation right for me?

  • If you have a budget, debt consolidation might be a good option for you. Debt consolidation can help you simplify your monthly payment, but it’ll only help you get out debt if you have a budget and stick to it.
  • If you have a plan for how you’ll avoid debt in the future, debt consolidation might be a good option for you. Similar to having a budget, debt consolidation only works if you have a plan for how you’ll avoid going back into debt in the future.
  • If you owe more than your annual income in debt, debt consolidation might not be a good option for you. In order for debt consolidation to be effective, you need to be able to pay off what you owe in a reasonable amount of time. If you owe more than what you can make in a year, this debt management solution might not provide you with any benefits.
  • If you have a low credit score, debt consolidation might not be a good option for you. In order to get a debt consolidation loan or balance transfer credit card, you need to apply for one. This means you need to have a good enough credit score to apply for these. If you have a low credit score, you might not be able to get a loan or credit card you can use to help consolidate your debt.

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 consolidation loan
  • 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.

Available Debt Consolidation Resources

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. 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.  


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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:

  1. Building a savings account that will be used to settle the amount of your debts
  2. Negotiating with creditors to reduce the amount of money you owe
  3. Authorizing the settlement between you and the creditor
  4. 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.

Alternatives to Debt Consolidation

  • A debt management plan may help you pay off whatever debt you owe. This method is especially helpful if you’ve tried different payment solutions and are still struggling to make a dent in your overall debt. With an effective debt management plan, nonprofit credit agents can help you come up with a repayment plan to help you get the financial freedom you want.
  • If you’re looking for a debt payment strategy, you may want to consider the debt snowball method. With this method, you start by paying off the smallest debt you owe. While you’re working to pay off this small debt, you’re making the minimum payments on your larger debts. Once you pay off the smallest debt, start on the next smallest and so on until you don’t have any more debt.
  • Alternatively, you can try the debt avalanche method. With this strategy, you focus on paying off the debt that comes with the highest interest rate. Just like with the debt snowball, you’re still making minimum payments on your other debts during this time. Then, once you pay off this high-interest debt, you can move on to the debt with the next highest interest until you’re debt-free.