When a person finds himself in over his head in debt, a common solution that is often considered is debt consolidation.
Many times it seems like a magic bullet that can eliminate many mountains of debt with a single shot. But one major question that many forget to ask is: how does debt consolidation affect my credit score?
It’s easy to understand the attraction of debt consolidation because it allows you to avoid huge sums of interest payments on your debt, and when you’re stressed out and sleeping poorly an easy cure is most enticing.
Debt payments are often a catch-22. It is often impossible to pay off the balance just by making the minimum payment amount, but if you stop payment altogether then you risk even higher interest charges, legal recourse and devastating your credit score.
While a debt consolidation service is one answer to your debt problems, choosing the wrong one may do more harm than good.
If the debt consolidation company is above board, then using one should not harm your credit score further. But disreputable debt consolidation companies have been known to tell customers to stop making minimum payments on their debts. The story they spin is that this will somehow make the credit card companies more likely to cut a deal. Even if this were true, stopping the minimum payments will only result in adding even more to the balance you will eventually be paying off, usually lengthening the time it takes to do so.
If you decide to go down the debt consolidation road, here are some tips to pick a good service:
Just because the company advertises a religious affiliation, or has a name implying a religious affiliation doesn’t mean it’s true. There is no law governing such marketing ploys.
Not all debt consolidation services are non-profit - even if they say they are. Make sure you’re dealing with a non-profit with 501(c) status before doing business – and ask for verification/proof.
Some non-profit agencies do require fees, but those fees should be minimum. Shop around first, so you can compare fee structures. If the company refuses to discuss fees up front, move on.
With a little research, and the right choices you can navigate the debt consolidation jungle without destroying your credit score (or your financial life). It will take some work, but isn’t it worth getting out from under your mountain of debt and getting back to a peaceful night’s sleep?
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