Numbers of Americans have significantly more debt than they have savings. Unlike their savings accounts, debt simply continues to grow. When debt gets out of control, many people look to options like bankruptcy. But, there is a way to take charge of your debt without having to hire a lawyer and spend time in court.
With debt consolidation, you can work on reducing your debt without having to enter into bankruptcy or cause further damage to your credit score. Debt consolidation is a wise choice for people who have overwhelming money owed to creditors, but very few people actually understand what debt consolidation is and how it works.
- Debt consolidation is like bankruptcy.
This myth is incredibly far from the truth. In fact, debt consolidation is unlike bankruptcy. It does not involve lawyers or lengthy plans that hurt your credit score for many years. Instead, it involves a repackaged loan that consolidates all of your debts into one big loan. This gives you more money to pay off the consolidated loan.
Bankruptcy does not do this. Many people do not fully understand what happens with bankruptcy, because it is complicated. In a nutshell, you have to work with a bankruptcy attorney, a judge, and a trustee. You will have to complete credit counselling and pay your attorney a hefty fee. After your bankruptcy is approved by the court, you will pay a trustee each month and the trustee will spread those payments to the creditor that you have to continue to pay. It is very stressful and continues for several stressful years.
2. Debt consolidation completely removes your debt
This is not a debt elimination program. It is a consolidation program and when debts are consolidated, the amount owed stays the same. It simply gets put into one big loan instead of several small ones. Nothing is negotiated, settled, or charged off.
This might not sound like much of an idea, but consider if you owe $50,000 in a bunch of little credit cards with interest rates that exceed 20%. If you consolidate those credit card balances into a big loan with an interest rate under 10%, you are actually going to save money in the long run. You will still owe $50,000, but you are paying it off at a friendlier rate. You will have only one payment, which will be easier to pay off and faster to pay off than the small credit cards are.
3. Debt consolidation will harm your credit score
Again, this is a big, fat myth. It might not help your credit score right away, but it will not harm your credit score like bankruptcy does. Many people who choose debt consolidation find that their credit scores actually get better because they are no longer getting phone calls from creditors.
When the big loan is acquired, the small credit card debts are paid off, so this actually helps your credit score. And, as you regularly make payments on the new loan, your credit score will slowly improve. You’ll still have a big debt ratio, so your credit score might not be the best, but if you make your payments, your credit score will not decrease.
4. Debt consolidation adds to your debt
Another lie. No new debt is acquired in a debt consolidation program. Your small balances are combined into a single loan. In a way, debt consolidation actually decreases what you owe in the long run. Since the new consolidated loan has a lower interest rate than the original debt, you will really have less debt because less interest will build up as you are paying back the loan.
5. You must own a home to consolidate your debt
This is another mistaken thought. You can live in an apartment. You can be a college student. You can be a homeowner, but you do not have to own a home to consolidate your debt. IT can be easier for homeowners to get a debt consolidation loan, especially if they have equity that they can use as collateral for the loan. But, it is not a requirement.
If you are using this as an excuse to not use debt consolidation, then it is time to recognise this as a myth. Instead, take care of your finances and do what is right for you.
6. Anyone can use debt consolidation
Anyone with excessive debt can look into debt consolidation. It is a program that can be done while working with a debt counsellor, but it can also be done on your own. There are companies that specialise in debt consolidation, but you do not have to work with them. The companies do not discriminate for any reason and they do not have to share your debt situation with any outside organisations like banks, credit bureaus, or employers.
7. You work with a debt counsellor
Unless you can get a big consolidation loan on your own, you will most likely work with a debt counsellor. These people are experts in help people better manage their debt and they know where to look for loans with the best interest rates. In some cases. The counsellor will look for alternatives to loans, especially if you are unable to acquire a massive loan.
Working with a debt counsellor might not be your first choice, but they do offer some benefits. In fact, they are good at helping you understand how the program works. They are also good at helping you manage the stress that comes with excessive debt. It gives you a neutral party to talk to when you need someone the most.
8. Debt consolidation will help stop creditors from calling
Those phone calls can become incredibly stressful and debt consolidation can stop them immediately. And, as long as you make all of your payments for the consolidation loan, you will never get another call again. This reason – by itself – is one of the best reasons to get the consolidation loan as quickly as possible.
Most people do not recognise how much their lives change when they lose those several little credit card payments and instead only have one loan to pay for. It is a wonderful program that helps in so many ways.
9. You learn to better manage your money
Because you have more money to use, you learn how to better manage it. People who enter into debt consolidation quickly learn how good it feels to have their money under control, so they work hard to keep it under control. With just one loan to pay for, you will find that you actually have money to put in a savings account and you will have money to make extra payments on the loan to pay it off faster.
The Easy Way to Get Your Finances Under Control
Working with a debt counsellor is a tried-and-true way to learn money management skills. They will share tips and tricks that you can use immediately to understand how you got into your financial situation in the first place. Then, they will help you better understand how to pay for things without having to go back into debt.
Debt consolidation is a significantly better tool for paying off excessive credit card debt that bankruptcy. While the debt still remains with a consolidation loan, you will not have to worry about paying lawyers, harming your credit score, and having to work with a trustee for several years. Your name will not be put in the newspaper as creditors are informed of your impending bankruptcy. Instead, with debt consolidation, your loan program remains anonymous.
How Debt Consolidation Could Affect Your Credit Score
The new loan you get during debt consolidation might put a momentary sting on your credit score, but that sting will not last long. After your old credit cards are cancelled and debt is moved to a new loan, your credit score will start to improve. No loans are cancelled, but when they are shifted to the new loan, your payments decrease and you get your life back.
If you choose bankruptcy, you are impacted by it for many years. You will pay your creditors for five or more years, then when you are finished, you will still have the record on your credit report for several more. You might have to sell your home and you might even have to sell your car if you are going into bankruptcy. Your wages might be garnished, so your employer will know. The entire situation is uncomfortable, unpleasant, and awkward.
It’s Just a Better Choice Selecting debt consolidation is a much better choice. You can do it on your own, without having to pay a lawyer or to see a judge. Your employer does not have to know anything and your world does not get turned upside down. Instead, you get your debt and your stress relieved in a manageable and positive way. In many cases, you only need a Social Security number and a photo ID to get the debt consolidation process started. With a simple phone call or a quick email, you can get your life back on track with debt consolidation.