I have significant credit card debt and I'm considering a consolidation loan. Is this a good idea? What other debt management options are there?
A consolidation loan is one way you can tackle credit card debt that may have become overwhelming. If you can qualify for a consolidation loan with a lower interest rate and use the loan to pay off all your credit card debt at once — and in full - doing so may indeed be a good option.
What is a Debt Management Plan?
If you are having difficulty making your payments, another option is a debt management plan. A debt management plan is an agreement made between yourself and your creditor. It usually involves negotiating reduced interest rates or payments on your account. The lower payment amount can make payments more manageable and will allow you to continue paying down the debt owed. In most cases, the account will be closed to further charges while the plan is in place.
Debt Management Services
Although you can always negotiate with your creditors on your own, there are debt management firms available that will help you negotiate with multiple creditors at the same time and develop a payment plan where you make one monthly payment to the debt management company.
The company then makes individual payments to each of your creditors on your behalf. Some debt management companies charge a fee for this service.
Before deciding to use a debt management company, you should research them carefully to make sure they are reputable. Keep in mind that even though the company will be making the payments on your behalf, you are still responsible for making sure the payments are made on time by the due date set by the creditor.
Debt Management Plans and Impact on Your Credit
If the company you hire makes the payments late, those delinquencies will be reflected on your credit report and will hurt your credit scores even more.
In some cases, your creditors may also include a notation on the accounts in your credit report indicating that payments are being managed by a debt management company.
There are also debt settlement firms who may negotiate paying a reduced or partial balance rather than the full amount owed to each creditor. In those cases, the debts will likely appear as settled rather than paid in full. Because a settlement amount means you did not pay the full amount owed, a status of settled on your credit report is typically considered negative.
Debt management plans where only the interest rates are reduced, but the amount owed is paid in full, should not result in the debt being reported as settled for a lesser amount. As long as you continue to make all payments as agreed under the new terms, the plan may not negatively impact your credit history.
Before you commit to any new agreement, you should talk to your creditor to find out how the account will be reported in order to determine whether your credit will affected negatively.
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The "Ask Experian" team