Debt Consolidation Criteria
Overcoming debt is a major concern for many people. Since credit score ratings determine mortgage rates, car loan interest and insurance rates, it's important to have a healthy score. The key to having a good score is a low debt to available credit ratio. There are different ways to reduce debt such as budgeting, credit counseling and debt consolidation. Of these options, debt consolidation is perhaps the most drastic choice. Debt consolidation requires research, patience and accurate record keeping. If not done properly, debt consolidation can worsen credit problems instead of fixing them.
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What is Debt Consolidation?
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The term debt consolidation refers to the act of combining all unsecured debt payments into one. There are different ways of achieving this goal. There are debt consolidation companies that will take over the customer’s payments while charging the customer one payment per month. Some individuals choose to obtain a line of credit or home equity loan with which to pay off all debt, leaving them with only the loan payment. The main objective is to have one monthly payment that's less than the original payments.
Debt Consolidation Criteria
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Before deciding on debt consolidation, it's best to review your current debt load and see if there are other options. For example, a debt load of only a few credit cards can be transferred to one card by working with your credit card company. It's also important to determine if the debt can be consolidated. Car loans, home loans, student loans and personal lines of credit are usually not eligible for a debt consolidation scenario. Another consideration is the severity of the debt. If you're having trouble making the payments on your current debt, then you may still encounter problems when the debt is consolidated, in which case bankruptcy may be a better option. Even though bankruptcy destroys a credit rating, using a debt consolidation company will also impact the score so it's important to weigh the options.
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Pitfalls of Debt Consolidation
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Using a debt consolidation company should be undertaken with a great deal of caution. There are reports of companies taking money from customers and not making payments to their creditors. This causes the customer’s credit problem to worsen. Look for companies that are members of the Better Business Bureau, and are certified by organizations such as the National Foundation for Credit Counseling (NFCC) or the Council on Accreditation.
Another problem with debt consolidation is that it may not solve the real credit problem. Dave Ramsey cautions consumers on his website against using debt consolidation companies. Instead, he suggests that they address their problems with handling credit, that they pay down credit cards using budgeting and work with creditors for better terms.
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If you're having credit issues and contemplating debt consolidation, visit the NFCC website for a list of reputable companies. The Federal Trade Commission also has several articles on repairing credit and debt consolidation reviews. If you're a member of a credit union you may want to consider applying for a personal loan to pay off outstanding debt. Credit unions offer better rates and sometimes have easier loan application criteria than mainstream banks. This is a type of consolidation loan but the effect on your credit will not be nearly as harsh as working with a debt consolidation company.
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