Debt Consolidation
“Money is a poor man's credit card.” -- Marshall McLuhan (1911 - 1980)
Debt Consolidation Companies are 501(c)(3) non-profit organizations that offer debt consolidation and credit counseling delivered by Certified Credit Counseling Services.
Disadvantages of Debt Consolidation
Should you choose debt consolidation as a viable method of controlling your debt problem, it is important that you understand the disadvantages of the process.
The fact that you have probably been late on payments will remain on your credit report and affect your credit rating.
The very fact that you have been successful in negotiating debt consolidation will be reported. Future loans may only be available at elevated interest rates and in fact some lenders may not provide credit until after you have retired your debt consolidation loan entirely.
The biggest disadvantage of debt consolidation is that the consumer is now taking what is unsecured debt and changing it to a secured debt that increases the amount they have to pay monthly on their mortgage which if they fall behind in the added cost (shifted not reduced) then instead of credit problems and “possible garnishment”, they loose their home.
Debt Consolidation is most effective when the minimal approach is to combine customized services in negotiation with creditors (where generally the account is allowed to age under a hardship while people use the time to save funds with which to pay the settlement amount) — get a quick settlement agreement within the first 30 days so no delinquency goes on the credit rating — then with agreements in hand (which will most likely range from 60% to 80% unless the “reason” is major medical, disability, cancer, death, etc.), open escrow for the refinance of a consolidation loan.
Debt consolidation does not — repeat does not — include automatic reduction in any amounts due. It simply confirms the amounts due and pays the creditor direct from the escrow - Also most debt consolidation companies are not 501(c)3’s — they are branches of or affiliates to — or lead generation entities of mortgage companies.
Having defaulted unsecured debt in garnishment states can put 25% of your disposable income at risk through a judgment and writ of execution being made against you (a judgment alone is not enough) — but to put 100% of your home at risk of foreclosure, not to mention the impact on added interest over the life of your mortgage, is a decision that should be carefully made — closely managed and should result in the continuation and strengthening of your credit with the creditor if managed correctly rather than the negative impacts that usually result — even if you have been late for 3 months on an account — any creditor should be willing to adjust the account to a positive standing to receive payment in full less some accrued interest.
Advantages of Debt Consolidation
All is not lost. Citibank, one of the largest of the credit card issuers, has stated that people that enter and stick to a debt management program improve their status in the eyes of the lender.
Those that successfully complete a debt repayment program are looked upon fondly by the members of the California Association of Mortgage Brokers. Both groups have seen that people who have completed a debt management program have a significantly lower rate of default.
Debt consolidation can be an affective solution to one's debt problem but it will only be successful if you dedicate yourself to following the plan. It takes dogged determination in the beginning but over time you will find that you will develop new fiscal habits.
Your new found habits will put your debt under control, increase your personal wealth and improve your quality of life. Keep in mind that if your re-payment term needs to be 5 years to fit into your personal circumstances, bankruptcy may be an option to explore.
Credit after Debt Consolidation
“Remember that credit is money.” -- Benjamin Franklin (1706 - 1790)
Most lenders implement a scoring system designed by the Fair Isaac Company to determine the credit risk you represent. Your score not only affects the interest rate you will be paying but the availability to obtain a loan itself.
Clean up your Score after Debt Consolidation
Pay your bills on time. The credit scoring system first considers your payment history which amounts to 35% of your total score. Next at 30% of your total score is the amount of money you owe. Lenders will worry if they feel you are overextended. Then at 15% of your total score is the length of your credit history, the longer scoring higher.
Newly acquired credit will make up 10% of your score. A large number of new accounts will lower your score. The final 10% is based on your history of managing fixed expenses and especially credit card debt.
As your credit rating is based on information contained in your credit report, you are well advised to contact the 3 credit bureaus to ensure that your credit report is free of errors that could lower your score.
As of September 1, 2005, you are able to access your personal credit report once a year for no charge.
Learn more about Credit Ratings and Credit Reports.
