Consumers that are deep into debt with credit cards or personal loans often struggle to stay afloat, especially if they’re managing multiple accounts and large amounts of money. An option for easing this anxiety can be found with debt consolidation loans. Even though debt consolidation programs have been around for quite some time, there’s still a considerable amount of confusion about what they are and why they can be a sound choice for those in serious debt.
Consumers should do their homework and understand there are some common misconceptions about debt consolidation. Read on to learn more about these myths.
1. Consolidation Destroys Your Credit
It’s important for consumers to look at debt consolidation as a “risk/reward” situation in terms of their credit. This means your credit will drop temporarily while you are enrolled in a consolidation program (the “risk”), due to opening or closing some accounts but then you’ll become debt free and your score will move up (the “reward”) as you make timely payments.
Recovering a good credit score is possible once you choose a solid consolidation plan with manageable payments and you stick to the long-term plan. Remember that your credit score is mainly tied to your payment history and what’s known as “utilization” which is simply the ratio between what you owe calculated against how much credit is available.
2. Debt Consolidation is Just Another Word for Bankruptcy
Many consumers see debt consolidation as a form of bankruptcy, but without the “benefits” of going through official bankruptcy such as being able to walk away from debts. Debt relief and consolidation is different because it involves a company working with a client’s creditors on their behalf. They use their expertise to negotiate fair settlements for less than the full amount, and the remaining debt is paid by the consolidation company. It’s important to understand that debt consolidation allows you to combine debts under favorable interest rates and eliminates the hassles of hearing from multiple debt collectors. Consolidation does not require the services of a lawyer, while going into formal bankruptcy requires the work of an attorney and involve court.
Bankruptcy involves writing off outstanding debts, but it comes with the heavier price of massively damaging the borrower’s credit score for upwards of 10 years once the bankruptcy is filed. Bankruptcy also becomes public record, and can be found by various groups that have an interest in your financial habits such as potential employers, rental companies, and mortgage brokers.
3. All Debt Consolidation Offers and Companies are the Same
Every debt relief company is focused on getting their client out of debt, however each one goes about it differently. The top companies offer a range of terms, rates, and program lengths that best suit the individual and their goals. Companies such as offer debt consolidation terms as short as 12 months, which encourage clients to aggressively pay off their debts. A quality provider will work with every individual to be sure the repayment amounts are realistic, so that the borrower isn’t being set up
for eminent failure. Quality companies will also have experienced staff members on hand via multiple contact channels who can discuss the terms and will keep you informed during every step of the process, including negotiations with creditors and final settlement amounts.
4. You Will Get out of Debt Guaranteed with Consolidation
A reputable debt consolidation company will provide you with a way to reduce your interest and fees in order to make payments manageable; however, if you continue to rack up interest-bearing credit card debt at the same time, then you likely aren’t chipping away at the overall problem. Debt consolidation is a smart way to reduce the amount owed and avoid bankruptcy, but clients also need to watch their additional spending carefully. It’s important to develop a plan that involves managing finances and delaying big-ticket item purchases.
Debt consolidation remains a way for people overwhelmed with personal debt to reduce their payments and get on a debt-free path. It shouldn’t be considered a “last resort”, but instead a strategy that people can use to reign in their debts and get back on a more financially-sound path. Exploring the myths surrounding debt consolidation is essential because it helps ensure borrowers fully understand the positives and negatives of such plans, and can make the best informed decisions.