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What is Credit Debt Consolidation?

Debt consolidation is a term that gets used a lot but I find most people do not fully understand what it really means or what their credit debt consolidation options are.

“Consolidate your debts” is a phrase that people hear all the time on TV and radio ads and therefore causes a lot of confusion. What is it really? All that really means is combining your credit card bills so that you only make one monthly payment. That is great and may help you organize your credit debt but it doesn’t really solve the problem of reducing your debts or helping you get rid of your debt altogether.

Truthfully, credit debt consolidation (combining your bills) is a beneficial attribute to most forms of debt relief programs. In addition to combining your bills, debt relief programs also can:

– lower your interest rates

– reduce the fees and penalties you may have accumulated

– actually reduce your credit card balance that you owe

– help manage collections companies who may be calling you

– help you with budgeting

– get you out of debt faster than you may otherwise

Let’s discuss the types of debt relief that include credit debt consolidation so you know what your options are and can select the best solution for your situation:

1. Credit debt settlement (also called debt reduction and debt negotiation)-
This form of credit card debt relief is a process whereby you hire a debt settlement company to negotiate a reduction in your credit card bill balances. It typically requires that you have at least $10,000 in credit card debt and it includes a credit debt consolidation monthly payment plan that typically lasts between 24-48 months at which point you are debt free.

How does it work?

Your settlement company will come up with a fixed monthly payment and will also set up a trust account with a trust account provider (like a bank) which will collect your monthly payments. As money accumulates in this account your settlement company will, one by one, begin to negotiate a reduction in your credit card balances with each credit card company you owe money to. In return for fast payment using the funds you’ve built up in the trust account over many months, they often agree to accept less money from you (if the negotiations are sucessful).

Thee are no guarantees that a settlement company will be successful on negotiating on your behalf but a reputable company will only take you as a client if they are fairly confident that they will be able to work something out with your creditors because they only get paid if and when they are successful.

2. Credit debt management (also called credit counseling)
Credit debt consolidation is also a benefit of any debt management program, however, unlike debt settlement, your debt amounts are not reduced. You still pay everything you owe typically over a 3-5 year time period but the debt management company program helps you get out of debt faster by lowering your interest rates and penalties. Many of these companies have non-profit status so they are highly regulated by the government and are forced to offer consumers high quality financial and budgeting advice as part of their overall program. They focus on education so you get out of credit debt and remain out of debt.

How do they work?

Like a debt settlement program they consolidate your credit debt into a single fixed monthly payment which you make monthly and they take those funds and pay your bills for you. Debt management companies have agreements with credit card companies and they are actually paid by them to help you pay your bills on time. To incentivize people in debt falling behind on payments to work with a debt management company, the credit card companies agree to lower your interest rates and fees.

Ultimately, the credit card companies want to get repaid everything they are owed and prevent people from getting into a situation where they must consider credit debt settlement or bankruptcy. Lowering rates is a small price for them to pay if they increase their odds of getting all the money you owe them repaid.

I like to think of the debt management companies as a financial coach who helps you manage, organize, and plan your way out of credit debt without having to default on your debts (like you do with debt settlement as part of the settlement process).

3. Home refinancing
Several years ago the term credit debt consolidation was also widely used by the mortgage refinance industry because people with equity in their homes could borrow more money by refinacing their home at a higher loan amount and use the cash to pay off their credit card debts or “consolidate their bills” as you often heard on advertisements. However, given what’s happened to the housing market that option is rare these days as home values have declined and there are much tighter lending standards.

So that’s it. Those are the 3 most common forms of debt relief all of which include credit debt consolidation as a benefit to the programs offered.

Which is right for you?

Only you can make that decision but learn as much as you can as understanding your options and educating yourself is the best recipie for success in your effort to get out of debt.