If you have large amounts of debt, consolidating it can be a viable solution to what may seem like an impossible situation. However, consider the pros and cons to debt consolidation before making your decision.
Consolidation Pros and Cons
Debt consolidation involves taking out a loan to help repay other debts. Consolidation merges all of your debt from various accounts into a single amount to be paid off monthly. This usually lowers your interest rates, allowing you to pay off your debt more efficiently. Debt consolidation may seem like a great option, but it requires a huge commitment. Although you may be able to get an unsecured loan to repay debts, more often than not, you'll need collateral. Your home frequently serves as collateral for a lender. You can take out a second mortgage on your home or apply for a home equity line of credit. If you're able to make payments after consolidating your debt, and you can still afford your other living expenses, consolidating your debt could be the right choice. However, if financial problems arise and you can't make the payments, you could lose your home. Consolidation doesn't reduce your debt--it simply makes it more manageable, which, for some individuals, is enough to put their minds at ease.
Consequences to Your Credit
Any problems resulting from bad credit will be reflected on your credit report and will affect your credit score. Most credit problems remain on your report for seven years. Debt consolidation won't immediately impact your credit score. If you continue to make regular payments in a timely manner, your credit score will improve with time.
Finding a Debt Consolidation Firm
To start the consolidation process, consider meeting with a counselor at a debt consolidation firm. Consolidation companies provide debt counseling services and will deal with your creditors or collection agencies on your behalf. Ensure a consolidation company's reliability by verifying its accreditation with both The Association of Settlement Companies (TSAC) and the Better Business Bureau (BBB). If the company has received more praise than complaints from customers, the firm can likely help you if you're unsure how to repair bad credit.