What is debt consolidation?
Debt consolidation is also known by another name, and that would be consumer credit counseling. It is a non-profit program sponsored by creditors such s credit card companies. In a nut shell, debt consolidation is when all of the monthly payments owed to creditors, is put together under one monthly payment. It is ultimately designed so that the debtor will be able pay back all of the money owed, plus interest. Obviously, the creditors want their money back plus their profit. This is why debt consolidation was started.
How does debt consolidation work?
Most people who go for debt consolidation do so for good reason. It is in many cases a last resort to stop getting those phone calls from people who they owe money to. In most cases, debt consolidation is done when the borrower owes money to several different sources such as credit cards, student loans, car loans and so on. Once the person approaches a consumer credit counselor, they will walk the client through the process of putting all of these bills into one bill, hence the name debt consolidation. The client is literally consolidating his or her debt into one payment.
The next obvious question will be “Why is this beneficial for me?” The answer is simple. Because when all of the payments are made into one single payment the interest rate will go down. Along with this, it makes it much simpler when it is one sum to pay. No need to try and figure out exactly how much is owed and to whom it’s owed to. And a lower interest rate obviously means more money to spend at the end of each month. This is why at least a moderate amount of money has to be owed for this program to make sense.
Is debt consolidation a good idea?
The answer to this question is yes. However, as mentioned before, it makes more sense when larger amounts of money are involved. Once the borrower goes this route, the likelihood of getting phone calls from debt collectors will diminish or even stop. In most cases, not only will the interest rates go down, but minimum payments will also go down. If the borrowers account was past-due, creditors will consider the account as current, after going with debt consolidation. If there is any over-the-limit or late fees, it will get eliminated. Studies have also shown that people who go for debt consolidation get out of their credit mess faster, compared to people who decide to fight it out on their own.
Does debt consolidation affect your credit?
There is a misconception that debt consolidation has the same effect on one’s credit as bankruptcy. This is not true; in fact the opposite is true. It was designed to help get rid of people’s debts in an efficient manner. Therefore, if anything, it will only help ones credit score. As mentioned before, it can make a past-due account, current. The end result of debt consolidation is financial stability and normalcy.
