Needless Debt

In our last post we looked at how you can use credit counseling to help get our of debt. In this post in the “Learning About Debt Solutions” series we are going to take a look at debt consolidation.

About Debt Consolidation

Debt consolidation is similar to the Debt Management Plan we discussed in the previous post about credit counseling in that you can combine your multiple payments under one new payment. A lot of times this new payment will have a better interest rate than some of your high interest credit cards. However, this requires taking out a new loan and generally is only available to those with at least decent credit. Sometimes these payments can take longer to amortize than your original debt even though the payments may be lower.

Cost

Many times debt consolidation should be seen as a method rather than a program. It is simply a loan that you take out and use to pay off your current debts and in turn pay the loan back over time instead. Therefore, the costs will be determined by the interest rate and amortization of the loan. However, as Dave Ramesy notes, this only treats the symptoms of your debt problems and many times you will find yourself right back into debt.

Affects on Credit

Debt consolidation in itself doesn’t have any effect on your credit as long as you make the appropriate payments on the loan you took out.

Conclusion

Debt consolidation is a good candidate for those that may have a history of good credit but may have unforeseen emergencies that came up and caused a lot of debt in a very short amount of time. Debt consolidation loans should be used with care as many of them are secured loans. This means that if you don’t make the payments on your consolidation loan you can lose the item that was used to secure it. For instance, if you took out a loan against your house and you don’t make your payments then you can lose your home.

Needless Debt is beginning a series of posts that will explore and explain the various debt relief options that you hear about. Many of these programs are becoming increasingly popular as big businesses are being built around them and advertising dollars are being spent. The series will be covering: credit counseling, debt consolidation, debt settlement, bankruptcy, home equity loans, credit card balance transfers, doing nothing, and finally we’ll examine a do-it-yourself program. The first entry in the “Learning About Debt Solutions” series will cover the topic of credit counseling.

About Credit Counseling

Credit counseling, also known as debt counseling, is a program that aims to educate the consumer about managing their debt and how to avoid debts they cannot repay. They will help you setup a budget and develop a plan for repaying your debt. Many of these programs also work with your creditors to create a specific debt management plan. These plans generally include a reduced interest rate and a reduced monthly payment paid over a longer period of time. These plans may also incorporate your multiple payments into one payment.

Cost

To get started in most credit counseling programs you will have to pay a one-time setup fee and usually you will also pay monthly fees to stay in the program. However, you will also see a lot of “non-profit” debt management programs being advertised. Be wary of these programs. There have been many accusations that these programs are being paid on the back-end by the credit companies themselves. Therefore, many of these programs are nothing more than debt collection agencies.

Affects on Credit

Simply enrolling into a credit counseling program will not affect your credit score or report at all. If you are just receiving advice and help about budgeting and a debt payment plan, you’re credit report will not even report this. However, if you do end up in a Debt Management Plan you may notice a difference. In most cases there will be a note on each account that you enroll into the Debt Management Plan showing your participation in such a program. While this may or may not directly affect your credit score, many lenders may use this in their decision to provide you with financing. The good news is that once you pay this account completely off, it typically won’t have any lasting effects.

Conclusion

Depending on your situation, debt counseling may be a solution for you especially if you are still current on your payments and heading into a period of hardship. This program is also helpful if you are just looking for some extra advice on your debt situation. However, if you are behind on your payments and cannot make your current monthly payments, you may consider another option. Also, you should be on the lookout for credit counseling companies that are really just collecting for credit agencies. Next time we’ll take a look at debt consolidation.