The flailing economy is forcing many Americans to take a closer look at their financial situations, including the amount of debt they're carrying. According to TransUnion's Quarterly Credit Card Analysis, the average bankcard debt per borrower increased to $5,710 in the third quarter of 2008. And that doesn't include other debt, like mortgages and auto and education loans.
What Is Debt Consolidation?
As you look for ways to save money and reduce financial obligations, debt consolidation can seem like the perfect answer. When people speak of debt consolidation, what they usually mean is payment consolidation. This means your payments are consolidated into one monthly payment, but your debts remain with the original creditors. Representatives of the credit counseling agency negotiate lower interest rates and manageable monthly payments with your creditors. Then, you make one monthly payment to the credit counseling agency and the agency distributes the money to your creditors.
Choosing a Debt Consolidator
Promises to "erase your debt in one click" and to "get on the road to debt-free living" can sound great, but the first rule of finding the right debt consolidator is this: If it sounds too good to be true, it is. You could end up being charged higher interest rates than what you have on your existing debts. Debt consolidators often put their own fees into your "one low monthly payment," and those fees can be as much as 10% of your payment. Before you choose a debt consolidation program, it is imperative to understand what you are getting into.
So how do you determine which debt consolidators are legitimate?
What to Look For
Seek advice from independent (repeat, independent) organizations designed to help people in debt. The National Foundation for Credit Counseling (NFCC) is a non-profit group that provides free and confidential debt advice. It offers web-based services and has over 100 member agencies and more than 900 local offices throughout the country. Through the NFCC, you can get budget counseling, debt management plans, financial counseling referral services, and homeowner counseling.
Check for accreditation. The NFCC or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) can help you find an accredited credit counseling firm to manage your debt consolidation.
What to Avoid
There are many options available for consolidating your debt, and the organization you choose can have a significant impact on the health of your credit score. With any credit counseling or debt consolidation agency, look for these red flags:
Don't let unscrupulous debt consolidators keep you from addressing a debt problem. There are great debt solutions out there. Just be sure you get the real story about the debt consolidator you choose to use.
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