What is Debt Consolidation?
Debt consolidation is what happens when an individual takes all of their debt and consolidates it into one simple payment. There are a number of ways that you can do this. You can consolidate your debt through loans, your home’s equity, or a debt repayment plan set up by a credit counselor. Debt consolidation through a debt repayment plan is probably the most difficult of the three to understand.
In the case of a debt repayment plan, you would need to contact a credit counseling agency and find out if you qualify for an interest rate reduction through your current lenders. If you do, you’d be expected to close all of your accounts and set it up so that you’re only paying one set payment through a credit counseling agency every month. The credit counseling agency will take your payments and forward them to your creditors on your behalf at a newer, lower interest rate.
This is something you’ll only want, and maybe be able to do, if your interest rates are under 10%. Otherwise, it may not be a benefit to you. If your interest rates are over 20% then you may be eligible for a significant reduction in your interest rates, which is good. Another great benefit of debt management plans like this is that you can make one set payment through the program, which allows you to prepare financially for your future.
The biggest factor preventing you from saving money with a debt consolidation loan is a low credit score or FICO. You will need a very high credit score, usually 720 and up, to qualify for a low rate loan. Even then interest rates for even the best credit scores are still in the teens.
You could possibly get a low rate home equity loan with a sub 10% APR but you still run into the same issue – you need a very high credit score to get approved.
A better way to consolidate without a loan is settle your debts away. Negotiate with your creditors and get your balances reduced is a better option for reducing what you owe to your creditors.