Debt consolidation offers consumers a chance to get out of debt and on the road to financial success. Many consumers worry that using these agencies may damage already fragile credit scores. Consumers must review the credit report completely when using a debt consolidation company to verify that all information is reported accurately.
Debt Consolidation
Debt consolidation agencies work with clients to review spending habits, expenses and income. In this way they can develop the best strategy for the consumer. Some clients may find that bankruptcy or lifestyle changes are better options than debt consolidation. The interview process done at the initial stages of debt consolidation will help consumers determine this.
Debt consolidators negotiate with creditors for lower interest rates and sometimes modified payment terms. They also offer the consumer the convenience of making only one monthly payment.
Credit Score Reporting
Accounts included in debt consolidation show on the credit report with a statement reflecting their status as being under debt consolidation. Modified terms also reflect on the credit report as being paid at a reduced rate. Future lenders may view this negatively since the account was not paid in full. Some agencies close the accounts when the consumer starts the debt consolidation program. This lowers the amount of available credit, resulting in a credit report that appears maxed out. The other issue with this is that credit history, which is an important factor in determining your overall credit score, is affected when accounts are closed.
Benefits
Creditors who work with debt consolidators will experience an end to collection calls and damaging late fees. Credit ratings improve due to timely and current payments. Utilizing debt consolidation helps consumers start to build a positive payment history. Payment history is 35 percent of the FICO score so it is important to build and maintain.
Working with a debt consolidator helps consumers understand the importance of budgeting and time management.
Considerations
Credit counselors provide budgeting and debt management advice at no cost to consumers. These counselors usually work at nonprofit agencies and can assist consumers with creditor negotiations. Working with a credit counselor typically is not reflected on the credit report.
Consumers without extreme debt may be able to pay down debt faster by just paying slightly more than the minimum due each month.
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