Consolidate your debt into one payment today   See Best Rates

Who Can Help Me Decide if Debt Consolidation is Right for Me?

Visit Profile

Claire Matthews

Financial Advisor, DCL

Who Can Help Me Decide if Debt Consolidation is Right for Me?

If you are struggling with your finances and barely keeping up with your minimum monthly payments, then you may be considering debt consolidation loans. It can be difficult to navigate this process, particularly if you are already overwhelmed with your debt. While there are some resources available that can assist you in determining if a debt consolidation loan is right for you, it is really up to you to determine the best option for you and your family.

Consult with a Credit Counselor

Many non-profit organizations offer credit counseling services with no fees or obligations. A credit counselor is a professional who is educated and trained in financial education, budgeting assistance and debt reduction and elimination services. Some organizations will also offer housing counseling services. A legitimate credit counseling agency will offer guaranteed service in addition to being accredited with the Better Business Bureau (BBB).

What to Expect When You Meet with a Counselor

If you haven’t already developed a budget or documented your debts and expenses, you will want to have that information for the counselor. The session will typically last anywhere from 45 to 90 minutes, where the counselor will review your finances. They will help you develop a budget based on your situation and provide reasonable recommendations for reducing your debt and increasing your savings. A legitimate counseling agency will not charge you for a counseling session and there is no obligation to use any of the services they provide or recommend.

Debt Management or Debt Settlement Plans

Most credit counseling agencies or organizations will offer debt management or debt settlement plans as an option to pay off your debts within a 3- to 5-year time period. Keep in mind, it would take you 20 to 30 years to pay off your credit card debt by just making the minimum monthly payments, and you will be paying interest the entire time. For many consumers, 3-5 years is a reasonable time to pay off their debts using a management or settlement plan.

A debt management plan allows you to combine your monthly credit card payments into one single payment, and the total monthly payment amount may be reduced. A credit card debt payoff calculator will be very helpful in this situation. The credit organization may also negotiate a lower interest rate. The agency may also negotiate a lower pay off balance with your creditors. A debt settlement plan is a good option if you already have a low credit score, because the credit organization will work with you regardless of your credit score.

There are consequences with a debt management or settlement plan. Some agencies may require you to stop paying on your accounts, which can significantly impact your credit score if you go into default. In addition, the monthly payments you make will go to the credit agency, and they will use it to negotiate with your creditors. During this time, your creditors will not be getting paid, so this will also look bad on your credit report.

Debt Consolidation Loans

A debt consolidation loan is another option to consider if you need help to reduce your monthly payments or consolidate your accounts. This type of loan will only work to reduce your debt if you have a relatively low interest rate. Again, it is important to find a reputable debt consolidation company who has proven success in helping people overcome their debt and successfully utilize the company’s debt consolidation loans or offers. There are many lenders available on-line and in physical store locations.

A reputable consolidation lender will allow you to ask as many questions as needed until you understand the loan details. In addition, they will not require you to provide any personal information or income details before offering you information on the loan options they have available. You should never pay any type of fee or charge up front before you have received any services.

Getting a Low Interest Rate

If you are already struggling just to make the minimum monthly payments to your creditors, you may already have a relatively low credit score.  If not, and you have good credit, you will have a better chance getting a low interest rate on your debt consolidation loan. Those who may not have good credit may have a more difficult time getting that low rate – but it can be done (or at least, you can get a reasonable rate that will still benefit your finances).

You have several options to choose from if you are looking for the lowest interest rate for your debt consolidation loan. Start with your bank or credit union to see what they have to offer for debt consolidation.  It is important to know the monthly payment plan and term in order to compare plans and interest rates. LendingClub.com and other similar online lending organizations are also another option to consider when looking for a debt consolidation loan. Also read: How does Freedom Debt Relief work?

If you choose a legitimate lender and you get a relatively low interest rate on the debt consolidation loan, you can actually use this as a way to improve your credit score, if you use the loan to pay off credit card debt on cards that are near the maximum limit. It is possible to have your credit score lower due to getting a debt consolidation loan, but then once you begin to reduce your credit card balances, your score will go back up.  You may have to be patient, but it is possible. Read more about different ways to pay off credit card debt.

Be Responsible with your Debt Consolidation Loan

A debt consolidation loan can make it easier to manage your debt. Remember, you’ll be hard pressed to find guaranteed debt consolidation loans for bad credit but its not unheard of. If you get a loan that has a lower interest rate than your credit card accounts currently do, then you are on the right track.  Instead of several smaller accounts with higher interest rates, you can reduce your payment into one single amount.  This can make it easier to make the payments on time, which will lead to an improvement in your credit score.

During this time, you should not attempt to open any new credit card accounts.  The goal for your finances should be to remove the debt and then live within your means so you only need to use a credit card in an emergency.  Only after you repay your debt consolidation loan should you consider applying for a credit card.  If possible, build up your savings account so you can rely on that in an emergency and avoid credit cards altogether.  This can make a huge impact on your financial success.

Immediately after your debt consolidation, your credit score may dip significantly, but you shouldn’t be alarmed. The amount your credit score lowers depends partly on how many credit card or debt accounts you have open.  The more accounts you have, the more accounts you have in default, which will categorize you as a high credit risk.  Once you begin to pay down those accounts and they are completely paid off, your credit score will reflect that and will rise. If you make your monthly bill consolidation payments on time (which should be your only payment other than household expenses), your credit rating will be higher than it was before you obtained the loan.

The Benefits of a Debt Consolidation Loan

A debt consolidation loan is a good option to consider to help manage your debt and finally get relief from barely making the minimum monthly payments on your credit cards or other debts. It can lower the interest rate you are paying and it can combine all those different payments in a single monthly payment. If you do not get a lower interest rate, or you can’t afford the debt consolidation loan payment amounts, you are not on the road to reducing your credit score. In fact, you may find yourself in an even worse financial situation than before you used a debt consolidation loan.

You should also consider how long it will take you to repay the debt consolidation loan in full and finally have financial freedom. The longer the loan term, the longer it will take to pay off and the more interest you will end up paying. Remember, during your loan repayment you should not be using or opening any credit card accounts.  This will not help your credit score and it may lead to another situation where you can’t afford your monthly minimum payments.

Regardless of the option you choose to reduce your debt, the outcome should be the same. Whether you choose a debt consolidation loan or a debt management plan, or you make your own plan and put every dollar you can toward paying off your debt, the end goal is to lower or eliminate your debt.  This will result in a higher credit score over time, no matter which path you choose to get there.

Bankruptcy

A bankruptcy should only be considered as a last resort to your financial struggles.. A bankruptcy is only for those with debt that significantly surpasses their income. It does offer the advantage of an automatic stay, which prevents creditors and collections agencies from harassing you with phone calls or garnishing your wages, which many consumers find extremely beneficial. If you qualify, a bankruptcy can eliminate just about all of your unsecured debt such as credit cards and medical bills. There are strict qualifications that vary by state, so you will have to do some research to determine if you qualify.

A bankruptcy will remain on your credit report for at least 7 and up to 10 years. It will also cause your score to drop. For most people who have enough debt to qualify for a bankruptcy, the damage to their credit score isn’t significant, because it was already low.  A bankruptcy will be included in public records, so any lender or employer running your credit history will see the bankruptcy, which can cause you to be declined for some services.

There are online resources that can help you determine the bankruptcy requirements in your state, so you may want to do some investigation if you are considering this option. It is important to understand that bankruptcy is a long process that can take up to 2 years, so it will not provide any immediate relief to your financial situation. You should look for an agency or law firm who deals specifically with bankruptcies, as they will have the most knowledge about your state’s specific requirements.

Consider All Your Options

After speaking with a credit counselor and reviewing your finances on your own, take some time to consider the cuts you make on your own, and how you would benefit from utilizing a service such as a debt management plan or a debt consolidation loan. You should have a clear idea of how much money you could save using each option, and compare that to how much you could reduce your debt if you attempted it on your own.

Reducing your debt takes time, dedication and a little sacrifice. Even if you choose a consolidation loan or management plan, you will still need to eliminate excessive spending and eliminate the use of credit cards overall. You cannot successfully overcome your debt unless you begin living within your income. If you find yourself using credit cards for necessities such as food or transportation costs, you may want to consider increasing your income until you can build up some savings or an emergency fund.

Just one unexpected expense or accident can put a significant strain on your finances. If you can develop a budget and determine the best financial plan for your situation, you can begin to build a back-up account that will prevent you from using a credit card during an emergency.  Credit cards can be useful, but they should be used responsibly and not as a bridge between paychecks.

Regardless of your situation, if you take the time to consider all your options and make realistic changes to your spending habits, you can be debt-free in just a few years. With the help of a credit counselor, you can determine the best path toward financial freedom.

Claire Matthews

Claire Matthews

Financial Advisor, DCL

Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.

Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.

Get out of Debt Today