Credit Consolidation Services – What Are the Drawbacks of Debt Consolidation?

With credit card balances rising in households, many consumers are looking for ways to manage their debt. One option is to consolidate it into a single payment. That reduces the number of payments and due dates to keep track of, and can also lower interest rates to help make it easier to pay off the debt more quickly.

Credit consolidation services offer a variety of options to help consumers, including loans, debt settlement programs and credit counseling services. Debt consolidation typically involves borrowing a new personal loan to pay off existing credit card debt, often with better terms than those offered on the individual cards. In most cases, applying for a debt consolidation loan requires a hard credit inquiry, which can lower your credit scores by a few points temporarily, though making on-time payments toward the debt will likely improve those scores over time.

A debt consolidation credit consolidation services loan is generally a good option for people who have a credit score of at least 670 and are not falling behind on their debt payments. These loans often carry a shorter term than the standard two- to three-year terms on credit cards, which can speed up total debt payoff and save you money in interest charges. You can find personal loans with competitive terms online or through companies like SoFi, LightStream and Happy Money. When shopping around, you should try to prequalify to see which rates you might qualify for without a hard credit inquiry.

Another popular option for credit card debt relief is a debt management program, or DMP. In this type of debt relief, a credit counseling organization will work with your creditors to negotiate more favorable debt repayment terms on your behalf, and then manage a single monthly payment on your behalf to pay off the credit card debt. The credit counselors might charge a fee for their service, but some organizations offer these programs at no cost to qualified applicants.

What are the drawbacks of debt consolidation?

The biggest drawback to debt consolidation is that it can have a negative impact on your credit if you miss payments. This is because a late payment to a credit card or debt consolidation loan can hurt your credit scores and may lead to added fees. If you take out a debt consolidation loan, be sure to enroll in the lender’s autopay program or other tools that can help prevent missed payments and save you the hassle of late fees.

Additionally, the process of borrowing a new loan can hurt your credit scores if you apply for too many new lines of credit, which will increase your credit utilization rate and lower your overall creditworthiness. Regardless of which type of debt relief you choose, be sure to seek low-cost financial advice and take other steps to reduce your living expenses or lower your spending, as those will have a more positive effect on your credit than debt consolidation.

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