Are Debt Consolidation Services Really That Effective?

Consolidating debt is an option for people who can’t make payments.  You could do this alone by putting all you debt on a low interest credit card or get a home equity loan.  There are also credit counselling services available as an option.

How Does Credit Counselling Work?

Credit counsleling consists of negotiating with a client’s creditors for lower interest and/or lower payments.  Late and over-the-limit fees are often waived as well.  Then the client sends the credit counselling agency one payment each month, and the agency distributes the money to creditors as agreed upon.

The Pros

A credit card counsellor can usually negotiate a lower rate or payment if you can’t.  You will be able to pay off your debt faster with the money you save.  You can also plan a budget to repay your debt and also still have some money left for other things if the counsellor helps you.

The cons

Sometime the monthly payment may be too high for the client to pay.  Creditors will only negotiate so much and sometimes the deal they offer may still be too much to handle.  If this happens you may have to find an alternative plan to repay your debt or consider bankruptcy.

Another thing about credit counselling is that it isn’t free.  Credit counselling agencies may charge monthly fees for their services, adding them on to your monthly payment.  If they don’t, they have to get the money to pay their employees somewhere.  That “somewhere” is usually from your debtors, as a percentage of your payment.

There is some debate as to how going through credit counselling affects your credit.  It is noted on your credit report.  In most cases, you can’t get new credit until you complete the program.  But it could also affect you after your debts are paid off.  Many lenders consider credit counselling as being similar to Chapter 13 bankruptcy.

Check out a prospective counselling agency first.  Just because they deal in credit counselling, it doesn’t mean that they are all honest.  The Better Business Bureau can help you with this.

It’s important to weigh the pros and cons of credit counselling.  You may not need to involve another party if you just take the time to work with your creditors first.