How Does Debt Consolidation Work

     In this article we are going to look at the advantages of doing a debt consolidation. You may have heard of debt consolidation referred to as Consumer Credit Counseling, debt management or CCCS. They are basically the same thing.  Doing a debt consolidation program is different than doing a debt negotiation program. In debt negotiation you are reducing the amount of principal that you will pay back and debt consolidation you are negotiating the amount of interest you will pay back. In debt consolidation you will pay all of the principal back plus interest.  You will keep your credit up in the process. A debt negotiation program will save you some money in what you owe to your creditors, but your credit scores will get hammered in the process. 

     The first benefit of doing debt consolidation is the reduction or elimination of accrued interest and penalties. When you stop paying or default on a debt on any of your accounts, the finance charges and interest do not stop piling on. Once you start getting behind in your payments, the late fees and over limit fees can really start adding up. Not only will you keep racking up interest owed on the original debt, but you will also rack up new interest owed on the late fees and over the limit fees as well. A debt consolidation program eliminates the portion of your total debt that is built up by accrued interest and other over the limit, late, and charge off fees. Why this is important is that the amount you owe will not keep going up (as long as you are not using the card) so your payments can begin to pay down what you owe.

     A debt consolidation program will give you only one payment to worry about each month. I have talked to people that have over 20 finance accounts to manage each month.  With that many accounts to worry about, one will likely slip through the cracks at some point and give you a late payment. Your credit will take a hit as well. Once you start to pay late the credit card companies can jack up your interest rates. Some credit card contracts allow for raising your rates because you were late on another company’s credit card as well. That is right, even if you have been paying on a card as agreed (on time) and you miss a payment on another card, the credit card company that you were paying on time might raise your rate too. I know it is crazy but that is how it works. With one payment to worry about, your chances of being late are minimized.