With so many people in debt, there is no shortage of companies to assist them in paying off their bills. Unfortunately, there is also a lot of misinformation regarding the various debt relief methods and that misinformation is confusing people. Here are the top five myths about debt consolidation services offered by debt management companies and the truth behind the myth.
1. Debt settlement is always much better than debt consolidation.
Debt settlement companies are very different from debt management companies. Many debt settlement companies promise to negotiate with credit card companies and other creditors to get lower interest rates. They charge their customers an upfront fee. Debt settlement companies instruct their customers to stop paying their bills, which generally leads to more credit problems for the customer. Debt consolidation combines all monthly debts into one manageable monthly payment.
2. Debt consolidation is quite similar to credit counseling.
Credit counselors assist clients by helping them learn how to effectively manage their money so they do not repeat the same behaviors that got them into credit trouble. Debt consolidation assists customers with their current credit issues and helps them get out of debt so they can practice the strategies they learn in credit counseling.
3. Debt Consolidation will improve a credit score.
The way debt consolidation affects your credit score depends on a lot of factors. If you have already missed payments, making them again will increase your credit score over time. Making payments also positively affects your credit rating because after you make a payment, you have more credit available. Again, this is an increase over time. It will not occur in a day. However, if you close accounts after you have paid them off so you won’t use them again and get back into debt, your credit score will decrease.
4. Filing bankruptcy has less impact on your credit than debt consolidation.
Bankruptcy is a good choice for a small percentage of people. Those people have debt that far exceeds their ability to conceivably repay it. Chapter 7 bankruptcy stays on the filer’s credit report for 10 years. That is far longer than debt consolidation payments will affect your credit. After your debts are repaid through debt consolidation, there will be no record of it on your credit report. Debt consolidation is not the best course for everyone. If you cannot commit to the monthly payment plan because you lack the resources, bankruptcy will have less of an impact than nonpayment of your bills.
5. Your payments will be significantly lower with debt consolidation.
Monthly payments under debt consolidation will normally not be very much lower than your regularly scheduled payments. There are instances where debt consolidation services are able to significantly lower interest rates, but sometimes the creditor considers that a settlement and reports the forgiven amount to the IRS, where it is considered income and therefore is taxable.
Several options are available for people who need help managing their debt. Consumers should evaluate their options carefully to be sure that they choose the solution that works best for them.
Matt Becker is a freelance writer with a strong focus on debt management. Matt blogs about personal finance for Cash Advance USA, a site that offer payday loans for those who need a quick money.
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