What is Debt Consolidation and how does it work?
Dec 23, 2009 in
Credit
David M
I am in debt with a credit card issued by my bank and the interest is killing me. How does debt consolodation work? If I do this, will my interest go down and will it affect my credit in any way?
I am in debt with a credit card issued by my bank and the interest is killing me. How does debt consolodation work? If I do this, will my interest go down and will it affect my credit in any way?
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6 comments
Lippy Lesbo. on December 25, 2009 at 7:07 am
If you have a high interest rate, I assume that means you’re still paying on your credit card and it hasn’t gone into collection?
If that’s the case, and it’s this one credit card you’re worried about, your best bet is to go with a balance transfer to another company. Bank credit cards always have a higher interest rate than credit companies such as Capital One.
Most companies also offer a lower introduction rate on all balance transfers, but they do have a time limit. You’ll want to make sure to check what the interest rate goes to after the inital time period.
Doing a balance transfer, as long as you continue paying on your credit card, will not really affect your credit.
Debt Consolidation is more for people who are way over their heads in debt, more than one credit card, car loans, etc. It takes all of your debts and consolidates it into one single debt, so instead of making multiple payments, you make one single payment.
Mike Jones on December 25, 2009 at 6:54 pm
Consolidation can be done when you cannot afford your monthly payment. When you have several high interest debt you can consolidate it into one lower, fixed rate loan.
So, if you borrow money at a low rate to pay off debt at higher rates, you may be able to save a considerable amount of money. What’s more, you’ll also be able to pay off your debt faster since more of your money will be going towards the principal balance each month.
Lys C on December 26, 2009 at 12:41 pm
YES debt consolidation will impact your credit score. I did this, they close your account and it will show as “account closed by credit grantor” on your report. Your best bet is to call the bank and negotiate… possibly freeze the card and lower the interest rate until you get it partially paid down.
Debt Guru on December 27, 2009 at 8:39 am
Debt consolidation comes in many forms, so it is important that you reflect on what your needs and concerns and financial situation are before deciding which route you would like to take.
The four primary concerns for most consumers are:
i) monthly payment
ii) time to debt freedom
iii) total cost
iv) the credit rating impact of the consolidation program.
Debt Consolidation Loan
Many people think first of a debt consolidation loan when seeking online debt consolidation. This option typically means a second home loan (or home equity line of credit) or refinancing your primary mortgage. In a debt consolidation loan, you exchange one loan for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high interest rate credit card debt. It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation, if there is ever a chance that you cannot afford the new mortgage payment you are now putting yourself at risk of foreclosure! In the case of a debt consolidation loan, most mortgages are 30 year loan, which means that the total cost and the time to debt freedom could be very high? but the monthly payment will be lower than other options and there is no credit rating impact.
Credit Counseling
Credit counseling, or signing up for a debt management plan, is a very common form of online debt consolidation. There are many companies offering online credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. It is important to understand that in a credit counseling program, you are still repaying 100% of your debts ? but with lower monthly payments. On average, most online credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan DOES show up on your credit report? and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy ? or using a third party to re-organize your debts.
Debt Settlement
Debt settlement, also called debt negotiation, is a form of online debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are NOT paying your creditors. This means that a debt settlement solution of online debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.
Net-net:
While there are many forms of online debt consolidation, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high credit card debt and poor credit may want to explore debt settlement or debt negotiation. However, each consumer is different, so find the online debt consolidation option that fits for you.
Jimmy R on December 30, 2009 at 3:37 pm
Try using:
They consolidated all my debt and helped lower my total debt about 25%. I highly recommend the service.
Dewey H on December 31, 2009 at 5:43 am
Refer to this link details on how debt consolidation works.