Why Debt Consolidation Doesn’t Work
Not right away, anyhow. When presented with the looming threat of a bankruptcy, many people wisely choose to avoid such a black mark on their credit record and try debt consolidation. This process allows a third party, often a non-profit agency, to lump all your debt into a single payment. Such an agreement usually comes with the added requirement of cutting up your existing credit cards and going without for the duration of the repayment.
The problem is, many people expect such a program to solve their debt problems immediately. While it does usually end the harassing phone calls and letters that accompany such high rates of debt, you’re certainly not in the clear, yet. Moreover, the terms of such an agreement do little to change the habits or problems that got you in such a mess in the first place. Most consumers can expect three to five years of what can amount to a rather painful monthly payment.
Also, most companies, whether for profit or not, will require you to have at least $5,000 worth of debt. That’s quite a bit for most people, especially when it mounts on a high interest credit card. Moreover, not all the major bills you pay each month are eligible for debt consolidation. For instance, while house payment count as debt, renters are out of luck.
For the credit cards you do have currently, the accounts will be closed and the information on those accounts often are reported as “in management,” though, not always. The interest on those accounts, however, will not be going away entirely. The company will bargain with each of your creditors to try and get a lower rate, sometimes able to reduce what might be as much as 30% annually, down to as little as 5%.
After doing all this leg work and bargaining on your behalf, taking into account your current income and the entirety of your debt, the consolidation agency will present you with sum you will owe them each month. Once you agree to this, they’ll tell your creditors to expect payments from the agency, as acting on your behalf.
Unlike some other forms of debt consolidation, you are not taking out a loan to pay all the debts off immediately. There will still be some interest rates, and not all credit card companies are interested in working with debt consolidation agencies. Some may even refuse to lower your rates at all, though this is somewhat rare.
Regardless, if you are able to make the new, consolidated payment every month, on time, you will certainly be on the road to financial recovery. This may show up on your credit record, but will not be nearly so injurious as late fee marks on your credit report would be.
There are several ways to take care of a debt that has spiraled out of control, but what all the reputable methods have in common is a long, hard road, that will only work if you work with the process.
Julie-Ann Amos is a professional writer and business consultant. She has over 14 books published in many countries. She runs Exquisite Writing, a large freelance writing agency that produces a wide variety of articles, web pages, website contents, books and ebooks for an international client base. Topic experts available for a wide range of subject areas, including finance articles and writing.
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Last 5 posts in Debt Consolidation
- Eliminate Credit Debt - CRA - Credit Reporting Agencies - August 31st, 2008
- Fix Your Finances With Debt Relief - August 31st, 2008
- Few Tips For Credit Card Debt Relief - August 31st, 2008
- Info on Credit Card Consolidation - August 29th, 2008
- Credit Card Consolidation - Pay Off Debt - August 29th, 2008
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