Credit Card Consolidation
As the economy takes a turn for the worse and as people get overwhelmed by their debts and the threats of bankruptcy, they turn to companies which consolidate credit card bills. While there are good-intentioned companies, there are also entities which aim for profit in the guise of helping people. Therefore, several things have to be considered before taking the debt consolidation plunge.
What is consolidation?
Debt consolidation, also called debt relief, refers to the way companies offer loans that can be paid to creditors. Rather than making multiple monthly payments, consumers are only required to pay the relief company once.
The company then pays off the consumer’s debts. Because these companies offer interest rates which are lower than the rates of the consumer’s existing debts, people see them as saviors in these debt-ridden times.
Type of debt covered
While debt consolidation loans can provide short-term relief, they cannot be used for all types of debt. Secured debts with collateral cannot be renegotiated by the debt relief company. An example of this is the home mortgage loan or the car loan.
If one fails to pay the mortgage, the bank takes possession of the home or the car. Consolidation only works with unsecured debts without collateral like credit card debts.
Choosing between bankruptcy or debt relief
After filing for bankruptcy, a person becomes protected from his/her creditors. This means that the creditors cannot go after the person and collect unpaid debt. This reduces one’s anxiety about nonstop phone calls, foreclosure proceedings or repossession threats.
Filing bankruptcy does not prevent a person from applying and receiving car loans or home mortgages in the future. It even helps the person regain a good credit score.
On the other hand, debt relief companies may make credit worse because they do not make timely monthly payments. This induces the creditors to intensify collection actions, augment interest rates or charge additional fees for late payment.
This can lead to diving credit scores. While loan interest rates of 14-15% may be charged to people who have good credit scores, people with bad credit scores are charged with interest rates as high as 18-21%.
As mentioned, credit card consolidation addresses credit card debts and provides short-term relief but can hurt credit scores in the long run. A person considering a debt consolidation program should look at all factors before jumping into the bandwagon.
Furthermore, it does not solve the root cause of debts – overspending. In conclusion, a person can lower debts by keeping spending minimal and, if pushed to the wall, declaring bankruptcy. This last option allows people to discharge their debts and have another try at a financially stable life.