Frequently Asked Questions about Consolidating Debt

Here are the answers to the most commonly asked questions about how to consolidate the debts you have.

How can I consolidate the debts I have?

Consumers have several effective consolidation methods from which to choose. They can take out a consolidation loan using credit cards, home equity, or personal credit and use the funds to pay off higher-interest debt. Alternatively, consumers may also choose to enlist the help of a debt consolidation company. A debt consolidation service arranges repayment plans with their customers' creditors in order to attain more affordable monthly payments and interest rates.

What's the difference between debt consolidation and debt settlement?

Debt settlement is usually reserved as a last resort for people with extreme debt problems. When you consolidate the debts you have, you still repay your obligations, but you do so at more affordable rates. On the other hand, with debt settlement, you cease payments on your accounts for a period of time while your negotiation service talks with your creditors. The goal of these negotiations is to arrange a reasonable repayment amount. When these negotiations conclude, your debt settlement company will require you to make a lump-sum payment to your creditors for the amount they arranged.

If I consolidate the debts I have, how will it affect my credit score?

Debt consolidation affects everyone's credit differently, so it's impossible to predict how your score will change. Some consumers see a temporary drop in their scores, others see an improvement, and some see no change. The effect consolidation has on your score will depend on your level of debt, your repayment plan, your creditors, and your consolidation service.

Is credit counseling the same thing as debt consolidation?

No, credit counseling is usually offered by non-profit agencies that help financially troubled consumers budget, pay off debt, and manage their money more astutely. Credit counseling is usually either free or very inexpensive. On the other hand, when you consolidate the debts you have professionally, you will deal with a for-profit consolidation service. Consolidation companies tend to work on commission, so the fees for this service will be considerably higher than those for credit counseling.

Can I still consolidate the debts I have if I am several months behind on my payments?

Most consolidation services will allow you to consolidate your existing debts as long as you are not more than three months behind on your payments. If you are seriously delinquent on your payments, the consolidation company may recommend debt negotiation or debt settlement instead of standard consolidation. For the most part, good candidates for consolidation are fairly current on their existing debt payments.