Frequently Asked Questions about How to Consolidate Debt

Here are the answers to the most commonly asked questions about debt consolidation.

What does it mean to consolidate debt?

The debt consolidation industry assists consumers in paying off high-interest debt by combining several loans or accounts into one payment. In many cases, a debt consolidation service can also pass on more affordable interest rates to the consumer. By bundling the debts into one loan with a better rate, the consolidation process enables the consumer to get out of debt more rapidly and conveniently.

Do debt consolidation services work with credit card companies?

This will be different for every consolidation service. Some consolidation companies do have arrangements with credit card issuers whereby they receive financial incentives for getting cardholders to repay their debts. In return, the consolidation company passes some of this money on to the consumer in the form of more reasonable interest rates. However, not all consolidation companies work with creditors, so you should ask your individual service for more information.

What kinds of costs will I face up front if I consolidate debt?

The up-front costs of consolidation usually involve a one-time commission fee and your first monthly payment. For example, let's say your consolidation service set your new monthly payment at $400. Because commission is typically the same amount as your monthly payment, you might owe $800 for the first month of consolidation. Every consolidation service has its own pricing practices, though, so this answer is not universally applicable. Some agencies also charge a monthly fee to cover administrative costs.

If I enroll in a consolidation program, who pays my creditors?

You will send payments to your debt consolidation service, and they will divvy the money up among your creditors accordingly. Most debt consolidation customers like this aspect of the process because they do not have to worry about paying several different creditors every month. Instead, they make one simple payment, and the debt consolidation company handles the distribution.

How will consolidating my debt impact my credit score?

This will vary depending on your consolidation service and financial situation. It's possible that consolidation might have no effect on your credit. In fact, it's not unheard of for consumers to actually improve their credit standing by enrolling in a consolidation service. On the other hand, certain forms of debt consolidation may temporarily damage your credit with some lenders. Make sure you ask your consolidation service about the effects of the process on your credit score before you go forward.

Don't believe everything you hear about debt consolidation. If it sounds too good to be true, it probably is. Learn about some of the most common consolidation myths today.