The Truth On Debt Consolidation Programs

Many consumers are finding themselves in debt as never before. As jobs are lost and the economy tumbles further into trouble every day, many people are forced into considering some sort of debt consolidation program. If this sounds like you, be careful of the choices you make and understand the ones available.

Before hiring one of these firms, it’s important to understand that there are two major ways to reduce your debt, and you don’t need to pay anyone to help you do it.

First, you can reduce your debt just by getting your interest rates reduced. This doesn’t affect your principle and you are still obligated to pay your creditor whatever it is you owe him. The second way is to have your principle reduced. Reducing your interest rate should be the first thing you try. This won’t hurt your credit rating. Reducing your principle with severely impact your credit history.

Some companies promise they will contact each of your creditors and negotiate “better deals”. They either try to get them to reduce your principle, or the interest. This type of process can cause a few problems for the borrower. First, you have no guarantee the company contacted anyone on your behalf. Second, you might be told you have a new payment structure when you don’t. You could start paying a lower amount because you were told to, but your creditor has no idea why you are now paying less and are behind on your payments.

If you do choose to work with a company that promises to renegotiate your payment terms, be certain you understand exactly what you’re committing to. What is it that they promise to do? How long will it take? Can you have final approval on any deal they are working on? In other words, are you giving them permission to act on your behalf and have final say in what happens? Not good!

If, on the other hand, you are lucky enough to find a reputable company that is able to actually get your creditors to agree to lower principle amounts, you are still in trouble when it comes to FICO score. Your creditors now report to the credit bureaus that part of your debt has been discharged and you are making partial payments. This is worse than being late with your previous payment amount!

In reality, you don’t need anyone to act on your behalf. These companies don’t have any better success with creditors than consumers. Why would they? Call your creditors, see what they can do for your interest payments, and go from there. Having your principle reduced doesn’t help anyone in the long run.