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Carrying a lot of debt is stressful, especially if the debt seems insurmountable. Debt consolidation—that is, taking several debts and consolidating them into one, often more payable debt—“can be a help, particularly if it reduces your interest rate,” says Greg McBride, senior financial analyst for…
Debt consolidation—that is, taking several debts and consolidating them into one, often more payable debt—“can be a help, particularly if it reduces your interest rate,” says Greg McBride, senior financial analyst for Bankrate.com. “It can provide a tailwind toward your debt repayment efforts.”
While reputable consolidation services do exist, many so-called debt consolidation companies are simply scammers looking to take advantage of consumers who are desperate to pay off debt. If you’re considering consolidation as a way to manage debts, keep the following in mind:
Only work with reputable services. Don’t work with just any business that says it can help you consolidate your debt. You may end up paying much more than necessary.
“If you consolidate wrong, it will cost you money,” McBride says. “You want to be dealing with a regulated, reputable, accredited financial institution.”
Debt consolidation isn’t the only way to repay your debts. Even without debt consolidation, most people can eventually pay off their debts by following a strict debt repayment plan, according to information from the Federal Trade Commission (FTC).
Developing a budget based realistically on how much money you take in and how much you spend is the first key to taking control of your debt. If you’re having problems repaying your debts on their existing terms, contact creditors to negotiate other payment terms, the FTC advises.
“The trick is to stick with the plan and keep throwing more money at your debts, and not to go out and run the debt back up again,” McBride explains.
Watch out for debt consolidation scams. Companies that guarantee to settle your debts for far less than you owe are not telling the truth, the FTC warns. Companies may also try to collect fees in advance of settling your debts, and many won’t explain the risks associated with their debt relief programs.
To avoid being a victim of a debt consolidation scam, the FTC advises that you do your homework and avoid entering into any deals that you don’t completely understand. By law, debt relief companies are required to give you information about their pricing, terms, expected results, and results of non-payment of your debts.
Don’t just fix the debt, fix the problem. Debt consolidation is “nothing more than moving the debt around,” McBride warns. Even when consolidation can help, bigger issues also have to be managed.
“The main issue is what caused this debt in the first place. If it’s a habit of overspending, that needs to be addressed,” McBride says. “Otherwise it’s like reshuffling the deck chairs on the Titanic.”
Consider consolidation options that don’t involve debt settlement programs. These programs are almost always offered by for-profit companies and come with risks and fees, the FTC warns.
Consolidation is really a matter of taking several debt obligations and rolling them into a single payment. This means that without going through a debt settlement service, you may be able to get a secured loan at a lower interest rate than you’re currently paying.
“A lot depends on the type of loan you’re looking for and how much money we’re talking,” McBride says.
For example, if you’re looking to pay off several fairly small credit card debts, transferring your credit card balance onto a lower-interest card could help you. You could also consider a personal line of credit, which can be unsecured or, for larger amounts, secured by anything from a car title to real estate.
Nonprofit credit counseling services may be able to help you. Many services are available through nonprofit organizations at little or no cost, including credit counseling and debt management planning. Visit the FTC website at consumer.ftc.gov for a list of nonprofit organizations that may be able to help.
Ilyce Glink is the author of over a dozen books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In! Her nationally syndicated column, “Real Estate Matters,” appears in newspapers from coast-to-coast, and her Expert Real Estate Tips YouTube channel has nearly 4 million views. She is the managing editor of the Equifax Finance Blog, publisher of ThinkGlink.com, and owner of digital communications agency Think Glink Media. In addition to her WSB radio show and WGN radio contributions, she is also a frequent guest on National Public Radio. Ilyce is a frequent contributor to Yahoo and CBS News.
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