Drowning in Debt: Is Debt Consolidation Right for You?

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Debt Consolidation: Is It Right for You?

The economic and housing downturns have left many families without savings and home equity, and some even without jobs. If you’ve fallen behind on payments or simply want to get out of debt fast, you may be considering debt consolidation. It can be a good solution, but it isn’t for everyone. When researching the debt consolidation option, consider the following:

What do you want to accomplish?

Some of the “services” offered by debt consolidators are things you can do yourself. For example, many companies will negotiate lower interest rates on your accounts (both credit cards and loans). But you can do that too, simply by calling your creditors and asking for lower rates. A debt consolidation firm isn’t likely to have any better results than you will.

How much can you afford to pay each month?

Are you currently able to pay more than the monthly minimums on your debts? If you can do that and negotiate lower interest rates, debt consolidation isn’t necessary. The only benefit would be simplification, as you’d make one payment to the debt consolidator, rather than several payments to your creditors.

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If, however, you can only afford the minimum payments or you’ve fallen behind on your payments, debt consolidation may help. It’s still smart to try and negotiate interest rates, etc., yourself first. If you can work something out with your creditors, it’s a “double win.” Your payments, interest rates and possibly your overall debt will be lower and you won’t owe any fees to a debt consolidation company.

Do you have other options?

People who need help with their debt often turn to consolidation companies first because they’re the most visible. You don’t have to look far or hard to find an advertisement from some company guaranteeing it can “cut your debt in half!” But you may have other, better, options.

If you’re a homeowner with decent credit, consider a home equity loan. Use the loan to pay off as much outstanding debt as possible, starting with the highest-interest-rate accounts first. The interest rate on a home equity loan should be significantly lower than credit card rates, saving you a lot of money in interest payments.

If you don’t own your home or don’t have much equity in the home, you may qualify for a personal loan if you have good credit. Again, the interest rate should be much lower than what you’re paying on credit cards.

Yet another option is to talk with someone at a non-profit consumer credit counseling agency. A counselor from one of these organizations can advise you on the best strategy for repaying your debt and will do it for free. Some counseling agencies offer payment plans, which they set up and manage for you for a small fee.

How to choose a company

If you’ve done your homework and determined that debt consolidation is right for you, choose your company carefully. There are a lot of scams out there. Fortunately, new Federal Trade Commission rules go into effect this fall that will protect consumers from some of the more common ones.

Starting September 27, debt consolidation companies will be required to fully disclose potential negative consequences of negotiating a lower pay-off amount (called “debt settlement”) with your creditors. Many consumers eager to rid themselves of financial liabilities pursue debt settlement without realizing that it can actually be a blemish on their credit reports. In addition, companies won’t be allowed to charge up-front fees after October 27.

When choosing a debt consolidation company, check its complaint history with the Better Business Bureau. If possible, work with a company that’s Better Business Bureau-accredited. Also, ask for a fee schedule and other policies in writing, and read them carefully. Ask questions; and keep asking them until you’re sure you understand how much you’ll owe for their services and what they’re promising to deliver.

Consider asking a company to work with just one of your creditors, as a kind of test run. It’ll give you a good sense of how the company conducts business and how successful it is at negotiating.

Money-related decisions can be stressful. You may be tempted to make a fast decision just to get it over with. But taking a little extra time to explore your options could save you both money and hassle.

[Free Resource: Check your free credit report and score]

For more ideas on how to improve your financial health, check out Quizzle.com, where you’ll learn how to achieve your credit potential and get home loan recommendations tailored to your unique situation. And check out these other great money-saving articles: