Frequently Asked Questions About Debt Consolidation

What does "debt consolidation" mean?

When people speak of debt consolidation, they are typically referring to taking all of your outstanding debts and placing them under one new loan. Most of the time, this results in reduced monthly payments and interest rates. Sometimes this also includes negotiating with your creditors to get the outstanding balances reduced so you end up paying less.

How will this affect my credit rating?

Since your credit rating depends on paying your bills on time, debt consolidation can help you continue to do just that, particularly if you are currently struggling to make your payments each month.

What debts can I consolidate?

Any unsecured debts can be consolidated, including any kind of credit cards, medical bills, cash advance loans, unsecured loans, and student loans. You cannot include mortgage and vehicle loans in consolidation because they are secured debts.

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

Debt consolidation reduces the interest rate and the amount you pay each month on your outstanding debts. You will pay the entire balance that you owe. Debt settlement involves negotiating a reduction in the balance due to each creditor based on a lump sum payment. Sometimes this is done by having you make payments into an account from which the debt settlement company makes payment to your creditors.

How will I know if debt consolidation is right for me?

If you're thinking about consolidating your debt, you are probably already struggling to make your payments each month. But before you decide to consolidate, you should explore all available options and be honest with yourself about your spending habits. If you are likely to end up over-spending and racking up credit card debt again, you may need to choose a different plan to deal with your debt.

Should I just file for bankruptcy instead?

If you cannot make any payments to your creditors (i.e., you lost your job), bankruptcy may be the only way out. However, it will stay on your credit report for ten years and will greatly hamper your ability to obtain credit. In fact, you will likely be advised not to even bother attempting to get a home loan for two years after your bankruptcy has been discharged.

Will my creditors accept less than what I owe?

This is always a possibility. Creditors don't want to send your account to a collection agency, and they also want to keep your business. Besides, it never hurts to ask.