 What is Debt Consolidation?
Debt consolidation is also known as credit counseling, bill consolidation, or credit consolidation. These companies usually tout their non-profit status or even their religious affiliation, but the programs all offer the same approach to debt relief.
The term "consolidation" is somewhat a misnomer. The “consolidation” does not come from getting a loan to pay off your creditors. The "consolidation" comes from writing one monthly check to the consolidation company. The consolidation company will then disburse payments to your creditors after the consolidation company subtract their monthly fee.
The main benefit of debt consolidation is that creditors will usually reduce your interest rates and eliminate existing late and over-limit fees upon entering the program. That way more of the money you pay goes towards your outstanding balance as opposed to only paying new interest and late fees. This means you can get out of debt faster. Additionally, since you will eventually pay off everything you owe, debt consolidation is less damaging to your credit score than debt settlement or bankruptcy.
Debt consolidation can get you out of debt. It can be a better choice than taking out a consolidation loan or filing for bankruptcy, but there are some drawbacks.
You Pay Everything
In a debt consolidation program you will pay 100% of everything you owe plus interest and fees. That makes consolidation programs a very expensive form of debt relief. Furthermore, it takes, on average, five years or longer to complete the program.
Your credits score still suffers
Just like debt settlement, debt consolidation DOES have a negative impact on your credit score. In most cases creditor will report to the credit bureau that you're enrolled in a debt consolidation program. This will likely lower your credit rating. In fact, some lenders look at debt consolidation as a form of Chapter 13 bankruptcy.
You give up control
Third, you have very little control in a consolidation program. You are relying on the consolidation company to disburse payments to your creditors on your behalf. Unlike debt settlement were your save money in your own account and accrue interest, you send money every single month to the consolidation company. Worse, if you miss a monthly payment in a consolidation program you could be dismissed from the program.
Buyer Beware
Fourth, credit consolidation companies are under increasing media and government scrutiny. The following are some recent news clippings:
“FTC, IRS, and State Regulators urge care when seeking help from Credit Counseling Organizations” An increasing number of complaints to federal and state agencies indicates that some organizations are engaging in questionable activities. (Federal Trade Commission – 10/14/03)
“FTC Testifies about Credit Counseling Abuses” The Federal Trade Commission's greatest concern about Credit Counseling Agencies is the deception about the nature and costs of their services. (Federal Trade Commission – 3/24/04)
“A new report issued by Consumers for Responsible Credit Solutions carries strong warnings for consumers seeking credit counseling services” The national advocacy group released a report that claims consumers frequently receive bad advice when seeking out a credit counseling agency. (Consumers for Responsible Credit Solutions – 7/12/04)
“CRCS report shows the NFCC is misleading the public about its nonprofit executive salaries” The findings of an 80-pages report recently released by Consumers for Responsible Credit Solutions raises questions about the public claims of some of the nation's most visible credit counseling agencies. (Consumers for Responsible Credit Solutions – 8/2/04)
Credit consolidation is lower risk and less damaging to your credit score than debt settlement or bankruptcy. It is a good option if you want to reduce the damage to your credit score and can afford to make the monthly payments. However, it may not be appropriate for you if you are deeply in debt, late on payments, or seriously considering bankruptcy.
Most debt consolidation companies charge both a onetime setup fee then a monthly fee throughout the course of your enrollment. Some companies use a flat fee structure while others charge by the number of creditors. In any case, fees vary widely from program to program so we recommend you shop debt consolidation programs diligently. Also, be wary if the program sounds too good to be true. |
