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Guest Post by Lyle Solomon It is common for people struggling with debt to receive notices and calls about overdue payments on their debt. It is advisable not to ignore them because they can become more stressful than managing your debt. Debt collectors try to contact the debtor multiple times before filing a lawsuit against them. Having a debt collector file a lawsuit against you can be stressful, and most people don't know how to address situations like this. The most crucial thing to do here is to respond to that lawsuit. Although you think you do not owe the debt you were sued for, you have to respond by either sending a letter or appearing in court by the deadline. Yes, debt collectors can take you to court Many people don't know that debt collectors can file a lawsuit to get their money back if they haven't paid off their debts. When people don't pay the debt they agreed to, collection agencies often file a lawsuit against them for breach of contract. To file a lawsuit, debt collectors must prove that they are the legal owners of the account in question. In most cases, debt collectors acquire ownership rights to unpaid balances when they purchase the accounts from the original credit card companies or other unsecured creditors. Many creditors will sell a debt overdue for 90 days or more to debt collectors for a small fraction of what they are owed. If this occurs, the affected person's credit report will include a "charge off" notation for the account in question. If a creditor "charges off" an account, the debtor has stopped making payments on the balance owed. When a debt is charged off, many people wrongly assume they are no longer responsible for paying it. Even if the original debt collector has sold your account to a new company, you are still responsible for making the required payments. What happens when a debt collector sues you? You should understand the debt collection process when you're being sued by a debt collector, even though timelines vary from person to person. However, if your timeline does not match the timeline stated below, you should verify the debt to ensure it is legitimate to avoid debt collection scammers. The debt collector contacts you by phone or sends you a written notice of their intent to collect the debt. The debt collector usually tries to contact you after a debt has been overdue for 180 days. A debt collector has only five days from the time they first contact you to send you a debt validation letter detailing the amount you owe, the name of the creditor, and the steps to challenge the debt if you believe it is not yours. Debt collectors are legally required to provide verification letters if you dispute the validity of the claimed debt. The debt collector has to send the verification letter within 30 days of the validation notice. If you owe money and the debt is valid, you must cooperate with the collector and work out a payment plan. The debt could be settled in full, partly, or through another arrangement. You can take the help of debt settlement services that can help negotiate your debt settlement. Your debt collector can file suit against you if you fail to settle the debt or make payments. You will have received a court date for your appearance by this time. The judge will probably side with the debt collector if you don't show up for your court date. The court will probably issue a default judgement or order against you in this case. As a result, a lien could be placed on your property, or the debt collector could garnish your wages. On average, a default judgement is entered 20 days after the lawsuit was served. Make sure you check the statutes of limitations on your debt The statute of limitations regulates how long a creditor or debt collector must file a lawsuit in court to get money from you for a debt. The statute of limitations is a time limit set by each state. Thus, the statute of limitations during which a creditor can attempt to collect from you varies. A creditor cannot file suit against you after the statute of limitations has expired. Many people wrongly believe their debt is no longer an issue just because they haven't heard from collectors in a long time. Contrary to popular belief, this is not accurate. Inactive debt, also known as "ghost debt" or "zombie debt," cannot be "resurrected" after the statute of limitations period has passed. However, in recent years, many collection agencies have started pursuing ghost debts. Debt buyers try to collect on debts no longer legally collectible by the original creditor by purchasing debts past the statute of limitations. Debt collectors often use threats and intimidation to coax people into paying debts they are not obligated to by law. Statutes of limitations are highly discretionary and vary significantly from one state to the next. The typical statute of limitations period is between three and ten years. When a person stops making payments, the statute of limitation usually begins to run. Individuals should exercise caution when communicating with debt collectors. If the debtor makes a payment, the clock resets to the last payment date. A debtor can ask a creditor to stop contacting them about an old debt by formally requesting it in writing after the statute of limitations has passed. There are options available to people harassed by debt collectors, whether they are scammers or legal entities. Any collection agency that resorts to abusive or harassing tactics to get at a debtor can be held responsible under the Fair Debt Collection Practices Act. The FDCPA is a federal law that shields consumers from collection agencies that engage in harassing behaviour. Individuals may initially file complaints with the Consumer Financial Protection Bureau and the Federal Trade Commission. The bottom line When a debt collector sues you, you should ensure the debt is valid. If it is legitimate, respond within the given time frame, or challenge the lawsuit if you feel the debt is not valid. If needed, seek the help of an attorney who can help you understand your rights. If you are asked to pay off your debt, you can enlist the help of debt settlement or debt consolidation services to help you pay off your debt efficiently. You should never forget your rights, and remember that the FDCPA is in place to protect consumers from fraudulent and harassing debt collection agencies. Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.
Guest Post by Lyle Solomon Most of us will incur debt at least once in our lifetime, be it student loans, mortgage, or credit card debt. Depending on your financial situation, debt can be good or bad. However, all debts are not the same, therefore managing these debts is not the same. Mainly, there are two types of debt: secured and unsecured debt, with other subtypes of debt coming under each or both. It's essential to understand how each kind of debt works, if you'll be able to manage it along with the rest of your obligations, and how it can affect you. What is debt? Debt is defined as something, usually, money, loaned from one party by another. Many corporations and individuals use debt to make large purchases that they would not be able to make under normal circumstances. A debt agreement allows the borrowing party to borrow money on the condition that it be paid back later, generally with interest. Let's understand the different types of debt: Secured debt A secured loan is one backed by tangible assets. A credit check is essential to obtain a secured loan since it determines the borrower's repayment capabilities. If the borrower doesn't pay back the loan, the lender is protected by collateralized assets. The property can be seized by the lender if a loan is not repaid on time. If the confiscated collateral does not pay the entire debt, the creditor can sue you to reclaim the remaining amounts. Secured loans can help you acquire a large loan. The lenders know they will be paid back because of the collateral. Secured loans offer lower risks for lenders than unsecured loans, so you may be able to acquire a low-interest rate. Examples of secured debts: Mortgage Home Equity Line of Credit (HELOC) Installment loan Car financing Revolving credit Unsecured loans Unsecured loans are loans that you can get without any collateral. Loans without collateral are made solely based on a borrower's ability to repay and their promise to do so. In an unsecured loan, you don't have the risk of losing any of your assets. Lenders review a person's credit record to see if they qualify for a loan. But not all debts are equal. Lenders analyze your payment history, current debts, credit scores, total income, debt-to-income ratio, etc. In general, a higher credit score means more options. A good credit score can earn you a low-interest loan. As a result, unsecured loans are granted faster than secured loans. However, it may be challenging to get approved if you don't have a good credit score or credit history. Even if you get approved, you might get a higher interest rate. Examples of unsecured loans: Most credit cards Student loans Personal loans Payday loans Medical bills Installment loans Revolving credit Debts that are both secured and unsecured A few debts fall under both secured and unsecured loan categories. These loans are referred to by different names in each major category. Revolving debt Revolving debts are open lines of credit. Here, you borrow up to a certain amount, also known as a credit limit. You can keep borrowing from that line of credit as long as you make the minimum monthly payments. The best example of an unsecured line of credit is a credit card, and a secured loan is a home equity line of credit. Installment debt When a loan is paid back in regular installments, it is called an installment debt. Payments are usually made in equal monthly installments, with one part being interest and the other part being the principal amount. As this is also known as an amortized loan, the lender must create an amortization schedule outlining the payments made over the life of the loan. Customers prefer installment loans for bigger purchases such as homes, cars, and electronics. Lenders like installment debt because it provides a consistent flow of cash to the issuer over the life of the loan, with monthly installments based on a predetermined amortization schedule. Best ways to handle debt A single debt might be intimidating, but having many debts can be even more stressful. Debt management can become a challenge if there is no understanding or planning in place. Budgeting and debt management to pay off debt can be done in various ways. Let's explore a few of them: Budgeting If you have a favorable debt-to-income ratio, budgeting may help you better manage your debts. The best way to make a budget is by dividing your income into three portions: 50% of your income is for your needs. Rent/mortgage, car loan payment, insurance, health care, groceries, debt payments, and utilities fall into your "need" category; these are your essentials. This category may also include your "must-haves" like Netflix, takeout, coffee from Starbucks, indulgences, etc. 30% of your income is for your wants. Your wants or non-essentials include going out to eat, seeing a movie or sporting event, taking a trip, purchasing a newly released device, purchasing designer clothing and shoes, or joining a gym. Even though they are wants, you are not dependent on them. 20% of your income is for your savings. This last 20% of your income goes into your emergency fund, mutual funds, IRA contributions, investments, etc. This portion of your money helps you build more money. Debt consolidation When you are stuck with multiple debts and don't know how to manage all of them, debt consolidation is your friend. Debt consolidation uses numerous forms of financing to pay off your debts and liabilities, such as taking out a new loan to pay off existing debts. Multiple debts are frequently combined into a single larger debt, such as a personal loan, with more desirable repayment terms, such as a lower interest rate, a lower monthly payment, or both. You can consolidate credit card debt, student loan debt, payday loan debt, mortgage payments, etc. You can do debt consolidation through any of the following options: Balance transfer card Debt consolidation loan Debt consolidation program Debt management A debt management plan can be useful to help you pay off your debt. A debt management plan's goal is to reduce the debt's interest rate and monthly payment amount, as well as to assist you in creating a budget to accommodate the payments. You can receive debt management plans from non-profit or for-profit credit counselors. Credit counselors work on your behalf to negotiate lower interest rates and lower monthly payments with your creditors. A debt management strategy is often a component of a larger debt reduction strategy, such as a debt consolidation strategy. Three cardinal rules to follow when repaying debt 1. Never be late on your payments2. Do not miss any payments3. Always pay a little bit more than the monthly payment amount The bottom line Knowing and understanding the different types of debt can help you manage your finances better in the long run. You have a choice: either you let your money control you, or you take charge of your financial situation and manage it effectively. The main distinction you have to figure out is which debt suits you best. You should always do research and have a plan to handle the debt before you sign the dotted line. Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific's McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.
Have you ever trusted a company that ended up letting you down? Not only is this a horrible feeling, but it can also lead to financial ruin if you had invested a large amount of money in the business. Companies that advertise debt relief sometimes sound too good to be true — can a company (that is trying to make money itself) really save you money or help you work toward being debt-free in a way that doesn’t leave you worse off? Can debt relief companies really be trusted to have your best interests in mind? The short answer is yes, some can. Legitimate debt relief companies do exist, but you as the consumer need to know what to look for in a company so you don’t end up getting scammed. Below, we’ll detail the signs of a trustworthy debt relief company, as well as some common myths about debt relief. We’ll ultimately answer this question: should you use a debt relief company? In the end, you’ll be equipped to ask all the right questions to a debt relief provider and better identify a shady company well before you commit any of your own money to it. What are the signs of a trustworthy company? 1. Doesn’t make money until you save money A debt relief company may be in business to make money, but a trustworthy one will only make money if it also helps you settle your debt for less than you owed before, or if it helps you save money in other ways. These ways can include negotiating a lower interest rate for your debt or helping you pay off your debt in less time to minimize interest charges. You should beware of a company that charges upfront fees and doesn’t have a refund or money-back guarantee policy associated with those fees. You should also beware of a company that charges you whether or not it actually helps your financial situation improve. Top debt relief companies such as National Debt Relief and Freedom Debt Relief do not charge upfront fees for their services. This indicates that the company is legitimate and can be trusted to handle your finances without stealing your money. 2. Offers a free consultation A trustworthy debt relief company will offer a free consultation, either in person or over the phone, to discuss your financial situation, the amount of debt you owe, and other relevant factors that may determine whether or not you would be a good fit for the company’s services. If you come across a company that charges for this initial consultation, just know that most top debt relief companies do not. You shouldn’t have to pay anything up front to learn about a debt relief company and decide if you want to enroll in its debt management program. 3. Holds industry accreditations Trusted debt relief companies typically hold at least one, if not multiple, industry accreditations. These recognitions come from third-party organizations and set standards of ethical behavior in the debt relief industry. One word of warning, however: "Accreditations are only as valuable as those doing the accreditting...and for the most part (in the debt relief industry at least) that is going to be founders of major [debt relief] companies," says Adam Selita of thedebtreliefcompany.com. So you'll want to beware of any bias there. If you notice that a company is accredited with a multiple trade organizations such as the American Fair Credit Council (AFCC) and the International Association of Professional Debt Arbitrators (IAPDA), this signals that the company cares about providing legitimate and certified help to its clients. 4. Has plenty of (positive) customer reviews One of the most important indicators of a reliable debt relief company is positive reviews from multiple customers. Both positive and negative reviews can help you determine how the company treats its customers and how people feel about their interactions with company representatives. However, if the majority of customer reviews or even a large minority are negative, this should be cause for concern. Make sure to read what customers are actually saying to determine if their negative experience was an isolated incident or if multiple customers have had the same problem. With debt relief being so closely tied to your financial situation, you need a company that continually pleases its customers and keeps its word. The best way to know if it does this is to read debt relief reviews yourself. --- Now that we’ve established the signs of a trustworthy debt relief company and what you should look for as a potential customer, let’s dive into some common myths in the debt relief industry and find out what you really can believe about debt relief. Common debt relief myths: debunked We asked experts in debt and finance to debunk some common myths or misconceptions related to debt relief. Just remember, every individual’s financial situation is unique, so while these debunked myths can alleviate some concerns you have about debt relief, they might not answer the exact questions you have. To get your specific questions answered in a way that meets your needs, we suggest consulting a certified financial planner or credit counselor. Myth 1: Debt settlement companies can’t really help. Many people worry that a debt relief company will just rip you off. However, according to Andrew Latham from SuperMoney.com, “debt settlement companies can be expensive, but, on average, they can save clients two to three times what they pay in fees.” You can always find cheaper debt relief options than working with a debt relief company, but your DIY or other solutions might not include the expertise, credentials, or experience that a debt relief company can offer, similar to how working on your own car may not produce the same quality of results as hiring a certified mechanic would. Contrary to what you might think, many debt relief companies really do have your best interest in mind and want to help alleviate the financial burden you are carrying. Just look for “legitimate companies with proper licenses,” advises Rasti Nikolic from LoanAdvisor. Myth 2: You have to pay for debt help. Debt relief companies seeking to make a profit are just one of many options you can turn to to get help with your unmanageable debt. “There are plenty of debt charities out there and free online services that do not require that you pay anything throughout the process, and even those debt relief companies you do have to pay won't hide any fees or costs and won't make you pay for anything you don't agree to,” says Scott Nelson from MoneyNerd. If the idea of spending money to save money sounds ridiculous to you, you’re not alone. Your best bet might be to find a nonprofit credit counseling service or debt relief agency, such as Greenpath Financial Wellness, that can help you work towards getting out of debt with fewer fees or less impact to your credit score. Myth 3: Debt is impossible to get out of. This is simply not true. Not only can you take steps to manage your debt so that it doesn’t consume your life, it is also completely possible to become debt free with the right kind of help. “The best thing to do is research all your options, start a budget, and set goals,” according to Nelson. Sometimes, the weight of debt can feel so crushing that it almost seems easier to hang onto it than to try to pay it off. This feeling is completely understandable and common. However, you don’t need to lose hope of being debt free. Many honest debt relief companies do exist, and while they still seek to make a profit, their strategies and know-how can be of great help to you, and as we mentioned earlier, good companies only make money if they do actually help you save money or settle your debts for less than originally owed. So don’t give up! Debt relief is a process, but being debt free is a realistic and attainable goal. Myth 4: Debt relief will take forever Just as debt accumulates over time, “debt relief requires commitment and time” (Lou Antonelli, Beyond Finance). The debt relief process typically takes 24–48 months to settle all possible debts, but this is small in comparison to a lifetime of debt if you leave it unresolved. According to a 2021 Harvard Kennedy School report, 74 percent of people who start a debt relief program have at least one account settled in the first 36 months, and in fact settle over half of their enrolled debt on average during this same time period. These are encouraging statistics and hopefully help you realize that in the grand scheme of things, debt relief doesn’t take forever at all, and may be well worth your time if you are feeling financially buried and looking for a way out. Myth 5: You can’t negotiate debt on your own. According to Fred Hoffman from Seniors Life Insurance Finder, “there is nothing wrong with trying to negotiate with your creditor by yourself.” While this is the case, this doesn’t mean that negotiating with creditors is easy. A debt relief company comes with a staff of certified debt experts who have worked with creditors across the country and settled debt before. If you are trying to negotiate without any help, you forfeit this additional expertise. However, if you have some finance background and feel confident in your negotiation skills, it is completely possible to negotiate your own debts and try to reach a settlement with your creditor(s). -- Now that you know how to identify a legitimate debt relief company and have clarified some incorrect information you may have heard about debt relief, the question remains: is debt relief right for you? Should you use a debt relief company? The answer to this question will always be "it depends." However, we asked debt relief experts what makes an ideal candidate for debt relief services, and here’s what they shared. If you check enough of these boxes, debt relief might be for you: If you’ve identified yourself as a good candidate for debt relief, you can find trusted, top debt relief companies using your newfound know-how, and ultimately, you can avoid trusting the wrong company to negotiate down your debts. Happy debt relief!
Guest Post by Orlando Rodríguez DISCLAIMER: The information provided in this article does not, and is not intended to be, legal, financial or credit advice; instead, it is for general informational purposes only. Debt settlement is when creditors or collection companies agree to clear a debt for less than you owe. It sounds simple in principle — and very convenient — but is it a money-saving tactic or a credit trap? What are the risks of debt settlement, and what are the alternatives? If you’re confused by debt settlement, you’re in the right place. In this brief guide, we’ll explore what the term means, and how it can affect your credit. What is debt settlement? When you settle a debt, you pay your creditor or a collection agency less than you owe, including existing interest and fees. Debt settlements are usually lump-sum payments, though some organizations allow consumers to set up payment plans instead. Debt settlement pros include: Reduced pressure from creditors A fresh financial start The chance to avoid bankruptcy The risks of debt settlement include: Serious credit damage Unexpected tax bills Extra fees and penalties Before you negotiate with a creditor or collection agency, think seriously about your options. Don’t make any decisions until you know what you’re up against. What are the advantages of debt settlement? We touched on the advantages of debt settlement briefly above. Now, let’s look at each plus point in a little more detail. Reduced financial pressure Debt can feel like a crushing weight. Constant calls from creditors and collection agencies cause anxiety, and the guilt associated with outstanding debt can lead to mental health issues. Perhaps unsurprisingly, getting rid of a debt can bring emotional relief. A fresh start If you currently pay a lot of money toward your debts every month, opting for debt settlement could help you find financial balance in the long term. Debt settlement offers don’t appear by magic — it takes a while before creditors begin to negotiate — but they’re a quicker route to a debt-free status than minimum payments. After you eliminate your debts, you can start again. That’s perhaps the biggest debt settlement plus. No bankruptcy Debt settlement can help you avoid bankruptcy. If you have assets you’d rather not part with, or you’re worried about the impact personal insolvency might have on your small business, you could be better off settling your debts than filing for Chapter 7 bankruptcy. If you’re hovering between bankruptcy and debt settlement, consult with a financial professional to find the best option for you. What are the negative effects of debt settlement? It’s wonderful to imagine a fresh start—an end to overwhelming monthly payments and the shame associated with unmanageable debt. There are downsides to debt settlement, however. Serious credit damage When you settle a debt for less than you owe, it makes a negative impact on your credit report. When you negotiate settlement terms and your original contract with the lender is modified, you’ll damage your payment history and your credit score will go down. Unless you’re able to negotiate to have them removed, delinquent payments and collection accounts will stay on your report for seven years—even if you settle. The impact on your credit score depends on the terms of the settlement and how it’s reported on your account. Unexpected tax implications Many people are surprised by the tax implications of debt settlement. When you settle a debt for less than you owe, part of it is written off—and the IRS sometimes considers the forgiven portion taxable income. On the face of it, that doesn’t seem fair—after all, you didn’t physically receive the forgiven portion of your debt. Nevertheless, you may need to report that amount to the IRS and if applicable, pay taxes on it. The tax-related rules that apply to debt forgiveness are pretty complex. To find out where you stand, ask an accountant or a financial advisor before settling debt. Extra fees and penalties Debt settlement strategies take time to come to fruition. While you wait for an opportunity to negotiate, your unpaid debts will accrue interest and fees. Sometimes, collection agencies charge additional recovery fees, which they apply when they agree to a settlement. If you agree to the settlement amount, if part of your agreement, you’ll also need to pay those fees. What are some alternatives to debt settlement? Not sure debt settlement is right for you? In that case, consider these alternatives: Renegotiation — Ask your creditors for an interest rate reduction, or talk to them about reducing monthly payments. Debt consolidation — Consolidating your credit cards and loans into one single lower monthly payment can greatly reduce the amount you spend on debt every month. Credit counseling — If you have trouble creating a workable budget and need help figuring out your finances, speak to a credit counselor or financial advisor. A debt management plan — Under the terms of a DMP, you make payments to reduce the amount you owe to all your creditors at once. Chapter 13 bankruptcy —Your finances get reorganized and you make court-mandated payments for a set amount of time after you file for Chapter 13 bankruptcy. Chapter 7 bankruptcy — Chapter 7 bankruptcy wipes the slate clean—but it’ll be difficult to obtain credit for a while, and the bankruptcy will stay on your record for 10 years. Bankruptcy is arguably the most extreme solution to debt. Consumers who opt for Chapter 7 bankruptcies have to liquidate many of their assets before they’re deemed debt free. Under the terms of Chapter 13 bankruptcies, people are allowed to keep some of their assets. Chapter 13 is safer if you own your own home or have valuable possessions you want to pass on. Speak to an experienced financial advisor and consult with a bankruptcy lawyer before choosing voluntary insolvency. How do you settle a debt? If you decide to proceed with a debt settlement strategy, you can take a DIY approach or work with a debt settlement company. Let’s review both options. The DIY route Creditors are unlikely to negotiate with you if they believe you can continue to make monthly payments or that you can pay the debt in full. To move into debt settlement territory, it’s best if your accounts are already delinquent by at least 90 days. If you want to continue missing payments while negotiating, know that there are serious credit-related ramifications associated with terminating payment in this way. So, consider keeping up with payments while at the same time building a lump sum to pay off the debt. Before you quit paying, talk to your creditors about reducing monthly payments. If you do stop paying your loan or credit card bill, late charges and fees will accrue and your credit score will drop. So, if you go the DIY route, know what you can and can’t afford to do, and find an agreement with the creditor that works best for your situation. Note: Remember, your credit score will drop dramatically if you stop paying your debts, so you’ll find it very difficult to obtain a loan or a credit card—possibly for years. A settlement company If you have a lot of debts to settle and haven’t been able to negotiate with your creditors independently, a settlement company can help take the pressure off. Settlement companies negotiate with your creditors on your behalf, reducing the amount of direct contact you have with the companies you owe money to. Settlement companies usually charge fees. So, it’s important to factor those into your payment estimates. On the flip side, they can help you recover a sense of financial stability and may also provide budgeting advice. Note: It’s hard to define what percentage of a debt is typically accepted in a settlement. Some companies won’t take less than 70 percent of what you owe, while others will go as low as 30 percent. Is debt settlement really worth it? In short, debt settlement is sometimes worth it if you can’t afford to pay off what you owe in full. If the risks of bankruptcy outweigh the benefits for you, and if you feel trapped under a mountain of debt, a settlement offer might bring peace of mind. If you decide to settle one or more of your debts, seek advice from a qualified tax professional about tax implications. Draft a savings plan to ensure you have the money to pay any taxes you owe at the end of the year, and create a solid budget to keep your finances on the level in the future. Finally, check out credit repair options, some of which could help you rebuild a solid credit profile. Orlando Rodríguez is a writer and content specialist for the Credit.com team dedicated to creating helpful, informative and eye-catching content. He completed his undergraduate work at the University of Utah focusing on Film and Media Arts. He’s written blogs and journalistic content for many different industries, and narrowed down his niche to the financial industry. In his off time, Orlando puts effort into crafting creative content around the arts.
This is Chapter 3 of 5 in our Ultimate Guide to Debt Relief series. Debt can strain your finances. It can make your day-to-day more difficult. Finding the best way out of debt is the first step to gaining control of your finances. While debt consolidation can sound like an odd idea — why would you take on new debt to get out of current debt? — it can be a good strategy for some. Here are questions you may have about debt consolidation: What is debt consolidation? What is credit card consolidation? How does debt consolidation affect your credit? How do consolidation loans work? How do you get a debt consolidation loan? How do you get a debt consolidation loan with bad credit? What is the best debt consolidation company? Key Takeaway: Debt consolidation can be a good option. Debt consolidation is transferring several debts into one. Debt consolidation typically has an overall positive effect on a person's credit score. You’ll want to consolidate debt with a stable and transparent company that serves its clients well. What is debt consolidation? “Debt consolidation works by transferring several debts to one centralized source, ideally with a lower interest rate than the original accounts and with a fixed repayment period,” says Matt Frankel, CFP and personal finance expert at The Ascent. In many cases, personal loans are used to consolidate debt. However, depending on your situation, you may be able to use your mortgage or do a credit card balance transfer to consolidate your debt. Instead of keeping track of multiple payment deadlines, you’ll just have one to remember if you consolidate. If you’re considering consolidation loan offers, pay attention to the annual percentage rate and loan length. “Debt consolidation lumps all your debt into a single monthly payment at a lower monthly payment, but usually for a longer period, higher interest, or a combination of both,” says Jacob Dayan, Finance Pal and Community Tax cofounder and CEO. Ideally, you’ll want a loan that has a lower overall interest rate than your current debts. A loan with a longer term length or higher interest rate may not be the best fit. However, in some cases it can make sense to get a longer term loan for a more affordable monthly payment when you consolidate your debt.. Keep in mind that you’ll need to pay origination fees when you accept a loan offer. You should also pay attention to the APR and interest rate. Note whether or not there are prepayment penalty fees. What is credit card consolidation? “Credit card consolidation involves transferring several credit cards into one debt, using the aforementioned options or sometimes even a new 0 percent interest credit card via a balance transfer,” says James Lambridis, DebtMD CEO. If you have a low amount of credit card debt, around $5,000, a balance transfer can be a great option. However, there are some key differences between a balance transfer and a consolidation loan. “Using a credit card balance transfer is different than using a personal loan to consolidate credit card debt for a few reasons. First, it's quite common to find a balance transfer credit card with a 0 percent APR, whereas you'll certainly pay at least some interest on a personal loan. Second, credit card balance transfers don't have a set repayment period, just an expiration date for the 0 percent APR. If you have the ability (and discipline) to pay off the entire amount you're consolidating within the 0 percent APR window, it's an option worth considering. If you can't, the fixed repayment schedule and interest rate of a personal loan could be the better way to go,” says Frankel. If you’re considering a balance transfer, compare several different credit cards and check the length of the period. Ask what fees exist for completing a balance transfer. Before you apply for the credit card, divide your debt over the total length of the interest-free period. Are those payment amounts you can fit into your budget? What happens if you make lower monthly payments? Will you still be able to get ahead of your current debt? Asking these questions will prevent surprises when you transfer the balance, pick the right card, and help you take advantage of the interest-free period. Keep in mind that your credit score will affect the rates you qualify for. The better your score, the better the rates. If you don’t quite finish paying off your debt with a balance transfer, don’t plan on using this tactic again. In some cases you may be able to, but ultimately applying for and getting new credit cards regularly has a negative effect on your credit score. Once you’ve transferred your balance, be disciplined in making regular monthly payments so that your debt is paid off before it starts accruing interest again. For the best results, do not make any new charges on your credit card because it will make it harder to pay off your current debt if you keep adding to it. How does debt consolidation affect your credit? Debt consolidation’s effect on your credit varies depending on your approach. However, the overall effects are typically positive if you make the monthly payments. If you get a consolidation loan “If you get a debt consolidation loan to pay off your high interest loans and credit cards it will actually help your credit score. Credit utilization ratio is the amount of available credit you're using and the lower your card balances the higher your credit score will be. So when you pay off your card your credit score will likely increase significantly,” Randall Yates, The Lender’s Network CEO. While this can have a nice positive impact on your credit, it only works for credit cards if you keep your current credit cards open. “However, there may be negative consequences if you close the accounts that you've paid off. But if you leave them open you may end up with greater debt as a result of continued use of the credit in addition to the consolidation,” Morgan Taylor, finance expert and LetMeBank CMO. As you look at consolidation loans, you’ll want to be careful about how many you apply for. Lenders do a hard inquiry into your credit every time you apply. If you have too many hard inquiries into your credit within a certain amount of time, your credit usually is negatively affected. “It can drop your score because it is another hard inquiry being pulled. It also turns short term debts into long term debts. Still, if you are having financial issues and debt consolidation will help you fix those issues, do it. You shouldn’t be worried about your score at this point,” says RJ Bryan, Credit Reps cofounder. If you do a balance transfer “Consolidating your credit card debt to a single credit card may not have as much of an effect,” says Frankel. Opening a new credit card to do a balance transfer increases your overall available credit. If you do not add any charges to your credit card, your debt-to-credit ratio will be better. If you close the old credit cards once you transfer the balance, your credit score will typically be negatively affected. Your debt-to-credit ratio also won’t benefit for having the additional unused credit. Keep in mind that many credit cards are considered revolving debt, which is not the best kind of debt. Revolving debt means that the card issuer has approved you indefinitely for a set loan limit that you can use at your discretion. Since the approval remains whether or not you use it consistently, it’s considered revolving. “If the new loan is a revolving account and if by consolidating your debt you maximize the revolving debt limit, this, too, will hurt your credit and your credit score,” says Bryan. Keep in mind that credit card issuers also do hard inquiries when you apply, so do your research beforehand and limit your credit card applications to protect your credit score. “While there is no way to know for sure how debt consolidation will affect your credit, it's likely to be a positive catalyst, especially if you consolidate your credit card debt and don't run it back up,” Frankel concludes. Bryan agrees. “Overall, it all depends on your situation. It could affect your score hugely or just knock off five points for the hard inquiry.” How do consolidation loans work? Consolidation loans are typically unsecured loans or personal loans that make it easier for you to pay off current debt. An unsecured loan has no collateral that can be seized if you fail to pay. A car loan is a kind of secured loan because the bank can take the car if you fail to pay. Unsecured loans usually have higher interest rates than secured loans because there is no collateral. You can also find secured consolidation loans. While lower interest rates are a plus, you’ll need to put up collateral for the loan. “Keep in mind that some debt consolidation loans are secured by collateral. Which means the loans are secured (another term for insured) by things such as your home, property, business, etc. So, if you default on your loan, the lender will be able to recoup their loss when you sell the home, property, business, or whatever you may have put up for collateral,” Dayan says. Consolidation loans can offer easier payment terms with lower monthly payments, though the term length of the loan may be longer. Longer payment terms can mean paying more in interest overall. Determine how much you’d pay to get out of debt, including interest, by making your current payments. As you consider loan offers, calculate how much you’d pay to get out of debt with each offer. Include any origination fees and interest in your calculations. Compare the two totals and consider the payment terms. Are the payment terms of the consolidation loan better for your monthly budget? How large is the total difference between making current payments and getting a consolidation loan? If you have a better shot of successfully paying off your debt through a consolidation loan, it may be worth paying more overall to have monthly payments that you can afford. If you get a bonus or have extra cash, some loans allow you to make additional payments on your loan sooner to help lower the interest that can accrue. Some loans have prepayment penalties, so before taking a consolidation loan, check to see if those exist and what they are. If neither option is feasible given your budget or how quickly you’d like to get out of debt, you may need to consider other debt relief options like bankruptcy or debt settlement. How do you get a debt consolidation loan? As with most loans, you need to apply, be approved, and accept the loan. Before you apply, compare consolidation loan offers from multiple companies. Luckily, you can find plenty of options with a bit of research. “Over the past few years, the personal lending market has exploded. There are dozens of reputable financial institutions now offering personal loans, so the best course of action is to compare several of the best personal lenders to see which best meets your needs,” says Frankel. You’ll want to find a lender that offers favorable terms to borrowers in similar situations. To do this, you’ll want to have all the details about your financial situation so that you can better identify potential lenders. “In the United States, a federal student loan consolidation does not have a credit requirement. Other consolidation loan credit requirement varies. Get your credit score, list your loans and payments, and start shopping around,” says Bryan. In many cases, you can do much of your loan shopping online. “There are many ways to obtain a debt consolidation loan. Most people use online lenders such as Lending Club, Prosper, or Upstart. This is the quickest and most convenient way to secure a loan,” suggests Lambridis. “Another way is to go into your local bank or credit union. You may be better off going this route because smaller institutions like these typically offer lower interest rates,” Lambridis continues. Do some research online then compare with your bank or credit union to see what they can offer to find the best rates. Pay attention to interest rates, length of repayment, origination fees, and what penalties exist for late payments or prepayment. Looking at these factors will help you compare loans and choose the best fit for your debt management needs. Approval for a loan and the rates you qualify for are based on your credit score. The better your score, the easier it is to be approved and get the lowest rates. How do you get a debt consolidation loan with bad credit? It’s hard to find a consolidation loan if you have bad credit. “Typically lenders want borrowers to have at least a 640 credit score to qualify. Borrowers with credit issues may have to look at a secured loan to consolidate debt, such as a home equity loan or cash out refinance,” says Yates. Some lenders may look at other factors, like your job history and income, in addition to your credit score to select the loan terms it can offer you. However, it can still be difficult to find a loan with favorable terms to consolidate your debt. If you find some consolidation loan offers, pay attention to the interest rates and compare it to your debts’ current interest rates. If the interest rates are higher with the loan than your current interest rates, it’s probably not worth it. If the terms are significantly worse than your current debts, that’s a good indicator that a consolidation loan does not fit your situation. It may be better to pursue another option, like debt settlement. What is the best debt consolidation company? As with all financial institutions, you’ll want to consolidate debt with a stable and transparent company that serves its clients well. Research companies to understand their experience and track record. Company websites will tell you all of the positive aspects. Looking at third-party review websites can help you get more objective information. Reading customer reviews can also give you a strong sense of how well a lender operates and treats its customers. Notice when people are leaving reviews — are they speaking mostly to the application and approval process or are they addressing experiences after applying for a loan? Check out Best Company’s top-rated personal loan companies and debt relief companies to read customer reviews. Learn more about how Best Company ranks companies. (Spoiler: Companies can’t buy rankings. Our ranking algorithm weights customer reviews.)