Debt consolidation involves combining all bills into one monthly payment. Ideally, if you are in a position to do it, you would take out a secured loan on your home or even your auto and pay off that confusing mess of credit card debt with all their different due dates and interest charges. You must also factor in closing and appraisal costs and whatever incidental fees may apply if you are considering this route. The distracting headaches would be replaced by one payment with lower interest because the loan is secured. If you can do this you can still leave the lines of credit open for emergencies and to keep your credit score high with a favorable debt to credit ratio. You would not do this unless you were very sure you could keep up with the payments because you need to protect your home as security. You can also try working out your own plan. If you have missed 1 or 2 payments, call the creditor’s customer service department and inquire as to whether or not they have a hardship program. Interest rates can be lowered, late fees and over limit penalties can be waived if you demonstrate a sincere desire to cooperate and resolve issues that have come up in good faith.
Do Homework on Agency First
If you are not in a position to help yourself this way you may want to consider utilizing the services of a Certified Credit Counseling Agency. Beware of scammers. The FTC has shut down hundreds of these companies for deceptive and unfair practices…including some non profits. Unscrupulous operators in the past have obtained non profit status to avoid the requirement of compliance with the Credit Repair Organizations Act. High fees, high pressure tactics and inadequate educational services have hurt the legitimate companies reputations as well. Be very cautious and ask a lot of questions before going this route.
When you sign up for this kind of program you agree to pay them one monthly payment which they use to pay your outstanding debts in a timely way. This is important if you are having a huge problem managing different due dates and are feeling seriously overwhelmed. You need to know that participation in this program will be a hindrance should you want a new loan. The program will probably forbid you outright from taking on new credit. These programs usually last 3-4 years.
On the plus side these agencies have prearranged reduced interest rates with major lenders. Over limit and late fees are usually waived.
A debt consolidation program of this nature will not damage your credit score. Since 1999 FICO has ignored credit counseling information. “Frankly we think consumers who participate in credit-counseling shouldn’t be punished in their FICO scores,” says Craig Watts, public affairs senior manager for Fair Isaac Corp.
Debt Consolidation not Debt Settlement
Do not confuse Debt Consolidation with Debt Settlement programs. Debt settlement programs involve those who promise such things as “Reduce debt by 65%.” “Get out of debt in 6 months” or “Cut your debt by more than half.” These programs will do lasting damage to your credit score. Typically these companies tell you to stop paying your debts and to send them the money instead. This is then put into a savings account. When it grows to a certain amount the company begins negotiating settlements at a percentage of what is owed. The company takes either a flat fee or a percentage of the difference.
Since you have stopped paying in the meantime your credit reports are now littered with month after month of delinquencies. On top of this when the debt is finally settled it will be marked with a negative comment such as “charged off-settled” or “Paid-Settled” to haunt you for 7 more years.
These companies also neglect to tell you that the IRS regards forgiven debt as income! There is a nasty surprise you don’t need.
Keep It Going
Now that you are seriously addressing your credit issues, buy a copy of On Home Buying and Credit Repair to further your understanding of the credit scoring process for the future. Read the book and follow my blog to learn about the always interesting and frequently counter-intuitive practices of credit scoring. Once your score is up there you will want to keep it there to enjoy all the benefits that will go with your high credit score for the rest of your life.