Being in debt can be excruciatingly painful, both physically and psychologically. Many people often seek the help of a debt consolidator. But just how does debt consolidation work?

Loosely defined, debt consolidation is combining all your separate debts into a single one. Instead of having multiple bills with different due dates, you now have one large monthly bill. Good, right? Not so fast.

Debt consolidation can be a double-edged sword. It can help you and it can also hurt you. And while not as devastating as bankruptcy, it does often hurt your credit score. As such, it should be considered only when the only other option is to file for bankruptcy.

There are basically two ways you can consolidate debt:

1. Obtaining what is known as a debt consolidation loan and using it to pay off most or all your debts. In most cases you have to use an asset as collateral as you will not be able to get an unsecured loan when already in financial distress.

2. Working with a debt consolidation company. This works with or without collateral. A counselor working for the company will negotiate a payment plan with your creditors on your behalf. Once a workable plan is reached, you will send one monthly payment to the company who will then disburse the funds to each of your creditors.

In both cases, it is best to work with a credit counselor, through a reputable debt consolidation service. Why?

1. A good credit counselor is often able to negotiate better repayment terms with your creditors than you would otherwise be able to on your own.

2. A good credit counselor will try to get into the bottom of your problem and find ways to cure the cause. This helps in avoiding getting in a similar situation in future. The counselor will work with you to come up with a sensible spending plan.

3. Often, but not always, interest rates can be reduced when working with a counselor.

4. Creditors will take your case more seriously when you’re working with a counselor. The counselor already has credibility and by you working with him/her, you demonstrate seriousness about rectifying your situation.

5. A credit counselor will handle your case in a more professional way than you would: No yelling and name-calling. If you hit a bump or two along the way he/she can notify your creditors on your behalf.

One downside of debt consolidation is that you will now have one big payment to make each month. You should make sure that you will be able to come up with the amount required.

Another downside of consolidating debt is that you often will be required to close all your revolving lines of credit such as credit cards. This is because credit card debt is a big problem and so that you don’t start charging all over again. Closing accounts negatively impacts your credit score by ending your credit history and reducing your available credit.

Also to note is that not all debt consolidation companies are legitimate. Some are outright scam. Do not be simply impressed by the word “nonprofit” either. Some so called nonprofit companies have been caught in shady practices.

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Related posts:

1. What Are the Pros and Cons to Debt Consolidation?
2. Credit Card Debt Consolidation – What You Need to Know
3. Is Debt Consolidation a Good Thing?
4. When Should I Consult Debt Consolidation Services Non Profit Companies?
5. Finding a Reputable Debt Consolidation Non Profit Organization