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Debt Relief – Insolvency – Bankruptcy Information » Debt Consolidation and Refinancing » What are the advantages and disadvantages of debt consolidation?

What are the advantages and disadvantages of debt consolidation?

I have two credit cards that I have used over 5 years ago and never paid back. The total of the two cards FIVE YEARS AGO was $1000. Of course, by now, it should be close to $3000 because of all the interests.

What does debt consolidation do? More importantly, can it REALLY remove or reduce the interest that built up over the last 5 years?

When doing a search for debt consolidation services, I get THOUSANDS of results. Which debt consolidation services are better?

Detailed answers would be appreciated.
Update: Am I correct to assume that if I leave the debt as it is, I can have it completely wiped off my credit card two years from now as if it never happened?


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3 Responses to "What are the advantages and disadvantages of debt consolidation?"

  1. Idiot_Savante says:
    Hi, Jimmy:

    First, I already answered a related question, so I’ve copied that answer below after the dashes.

    If your number one objective is to simply improve your credit, you could just wait it out for another 2 years until the debt is 7 years old. You can then ask for it to be removed from your credit report. If this is your objective, then don’t pay the debt. Records on your credit report are good from 7 years of last transaction so any payments or charges you make resets that 7-year clock.

    Personally, I’ve never used a debt consolidation company because I’ve felt capable of trying the same tactics myself. Granted, these companies are professionals and may get special “deals” and privileges that I wouldn’t get, but I’ve still been pretty pleased with my own results.

    Before using a debt consolidation company, I recommend trying your own hand at it. Contact your creditors. Before you do, determine how much you can afford to pay in a monthly payment. Even better, if you have some money saved up as a lump sum, you can try to pay them off in a couple of chunks. The more money you can give them at once, the better your negotiating power.

    If you’re in collections, ask the creditors by how much they’ll reduce the total amount owed if you pay now/in 30 days/in 60 days/within a year.

    If you’re not in collections yet, ask the creditors how much they’ll reduce your total interest. Some companies (e.g. Discover used to do this) will even suspend interest entirely while you’re in re-payment. Of course, you can’t use the credit card during that time, but you’re saving money and salvaging your credit.

    Good luck!
    There are several benefits to credit card consolidation:
    - Convenience (only one or two payments)
    - Easier to manage (less likely to forget a bill!)
    - Possibly a lower combined interest rate

    Generally, when companies help you by consolidating your credit cards, they contact the credit card companies on your behalf and try to negotiate a lower interest rate (you can do this on your own, by the way). Then, the companies can take one of several methods for that single consolidated payment. Options include…
    - Financing your debt themselves and then THEY pay your creditors
    - Helping you find a financier to consolidate your debt
    - Having you roll all of your debt under one of your existing accounts and pay off the others

    As such, credit card consolidation does not affect your credit rating. In fact, the results of consolidation are often positive simply because it’s easier to manage and you may pay less interest.

    All this being said, I’ve never used a consolidation agency because I never wanted to pay the fees. Instead, I contacted my creditors myself and asked for the best possible interest rate they could give me, and asked what kind of arrangements I could make to manage debt. In general, they all worked with me.

    By the way, here’s one thing to consider when paying off your debt: Bad credit falls off your credit report 7-10 years after your last transaction. So, if you have a liability that is 6 years and 10 months old, carefully consider whether you pay it off or not. If you touch that account at all, even if it’s to pay it off, suddenly that 7-year period is renewed. So, the choice you have to make is: Do you want something that was bad and is now paid on your credit report for another 7 years, or do you just want it gone entirely?

    There are some ethical questions there, too (e.g. if the debt was yours and you were above 18 at the time, you should pay the debt to be ethical). These are questions that only you can answer. But, when working with a consolidation company, make sure they only consolidate the accounts you want them to touch.

    Good luck.

  2. Skip says:
    Debt consolidation is taking all your debt and consolidating them into one, supposingly smaller debt, thus reducing the amout of over all interest you are paying on several debts.

    Debt consolidation companies are companies that act on your behalf talk to the companies you are in debt with, perhaps negotiate the debt down if you have not paid on it in awhile and perhaps it has gone to collections. Some or most of these companies are non-profit companies, however there is a charge of a percentage of what they save for you that is normally leveled against you.

    You can do the same thing yourself by finding a company that will give you a loan to pay off all your credit card debt and other debt that you might have into one single debt, thus reducing your debts to a single debt with a lower monthly payment, and in most cases lower interest rate, but the interest rate will depend on your credit scores off your credit report. You don’t have to have the top scores to accomplish this. Lower scores simply mean that your interest on your debt consolidation loan would be a little higher, though probably less than what you would be paying for all your credit cards and on the debt combined.

    From what I gather you have two credit cards that you are behind in payment since you indicated you have 2 cards over a 5 year period that you have yet to pay back what you have used on them.

    They have probably been sold to another company by now. this is called a charge off by the company that originally had your credit card debt. You, in some cases, can call those companies that have purchased your unpaid debt, make a bargin to pay them in one lump sum, say you are able to pay them 1/3 of what you owe. In this instant you stated that the debt was at one time $1000. If it was sold for that amount you might be able to pay if off completley for around $350.00, just make sure that if you do you ensure that the company send a piece of paper to the credit bureaus that the debt is “PAID” simply “PAID” this will cause your credit score to go up a little better than “PAID CHARGE OFF” which they will place on your credit report if you don’t ask them to place “PAID” on your credit report.

    I hope this has helped you in some way.

  3. jemhasb says:
    Being in Australia, I can’t comment on what facilities are available. Go to a bank, or other financial institution and ask them what they offer.

    First, and most important, DESTROY ALL your credit cards. No use consolidating debt if you just use it as an excuse to get into more debt.

    Second, make payments that are about the same as you make on the total of all your payments at the moment. ie if you have 3 payments of $75.00, arrange your new loan so that your new monthly payment is about $200.00.

    Now, to answer your question. Debt consolidation is getting one loan to pay out all your other loans. This means that you have only one payment per month to pay and that payment is a set amount. Depending on the terms of the loan the payment or the length of the loan may vary if interest rates go up or down.

    With debt consolidation, you arange a personal loan which may be secured or unsecured at an interest rate which is far lower then your credit cards and often with reduced fees. Here, you may pay 15% to 20% interest on your cc but only 7% to 10% on a personal loan. A saving of between 5% and 13% on $3000.00 will be as little as $150.00 to as much as $390.00 in the first year.

    The thing is that you have only one debt to pay, and destroying your credit cards stops ffurther debt.

    Yes, it should help reduce the interest you pay on your debt. The only way you can eliminate it is to pay it off.

    There is some great advice in the bible to everyone, not only Christians. It comes from Rom 13:8 and says ” Owe no man any thing, but to love one another…”

    I have debt, but I am heading to the place where I can be compliant with this Godly advice.

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