Debt Consolidation Basics

Debt consolidation is often associated with non-profit consumer credit counseling services. Although it may sound like a loan, debt consolidation is entirely different. Unlike a loan, your debt is "consolidated" and your interest rate reduced without the need for a loan. A credit card debt consolidation program will negotiate with your creditors rather than advising that you take on additional debt. Often these services are a "win-win" situation for the consumer.

The consumer gets:

• Their interest charges reduced
• Their monthly payments minimized
• The convenience of paying all their debts in one monthly payment
• Through regular monthly payments, the consumer is back on the road to restoring their credit rating
• Satisfaction knowing this program is largely paid for by creditors

No wonder these services have become the number one recommended way of dealing with excessive debt.

The way this program works is that a debt consolidation professional will contact your creditors to get your interest rate and monthly payments reduced to an amount that you can afford. These professionals already have working relationship with creditors and know how to get the best deal for you. If you have a $5,000 debt with MBNA at 21% interest, a professional counselor will likely be able to get MBNA to lower your interest rate and monthly payments significantly.

A good company can lower your monthly payments by 50%. Sometimes they can even eliminate interest charges altogether. This way your entire monthly payment goes toward the principal. Also you no longer pay your creditors directly. All of your debts are organized into one manageable and reduced payment to the debt consolidation company. They, in turn, pay your creditors on your behalf.

A good debt consolidation company can offer savings over the repayment period that are dramatic. Below is an example of the typical amount you might save in interest charges if you used a debt consolidation service and owed a credit card company $3,500:

Total Payment Not Using Service:
$7,069.98

Total Payment Using Service:
$3,184.98

Amount Saved:
$3,885.00

Do your homework when considering other debt services. Some services may take advantage of an already vulnerable situation by charging you fees, sometimes pocketing your first large payment which was supposed to go to creditors. Make sure you carefully research those who handle your debt for you.