Some Frequently Asked Questions
What is debt consolidation?
consolidation is any type of plan that allows you to roll
several debts together and pay them off as one debt.
Does debt consolidation reduce my debt?
it just re-packages your debt. However, in some cases, you
may end up paying less per month because you can consolidate
at a lower interest rate. (That is the sum of your old
monthly payments can be less than the sum of your new debt
consolidation payment.) At any rate, it simplifies things
because you now only have one payment instead of several.
Will debt consolidation hurt my credit report?
done correctly, debt consolidation will not only not hurt
your credit report, it could help it. However, your credit
report is complex and looks at many things. Many people have
hurt their credit score before they reach debt
How can debt consolidation improve my credit?
consolidation re-packages many debts into one debt. It
usually involves paying off the debts with one giant loan,
and then paying off the loan. Paying off your debts could
help your credit. Having only one payment instead of several
decreases the chances you’ll miss a payment or be late, so
it can help, there, too. Plus, debt consolidation is a
recognized, reputable approach to debt management, so if
creditors find out you’ve consolidated debt, that do not
necessarily think less of you as a potential borrower.
How does debt consolidation work?
first step is to contact a certified credit counselor to
work with you. If debt consolidation is the right approach
for your situation, there are three main types of debt
consolidation. They are mortgage refinancing, a home equity
loan, and then a regular loan, either secured or unsecured.
Do I have to own my own home to do debt consolidation?
but two types of debt consolidation are based on home
ownership. They are refinancing your present mortgage or
taking out a home equity loan. If you own a house, these may
be the better ways to consolidate your debt.
How does refinancing work?
you have an existing mortgage, you can work with your lender
or another mortgage company to re-do your mortgage. In
simplistic terms, you are going to take out a new mortgage
on your present home. This mortgage will be used to pay off
your old mortgage (whatever is left on it) plus your debts.
You still own your home, you are left with some cash (to pay
your debts), but you have a different mortgage. Since you
can structure the mortgage as a 30-year mortgage, you may
not see a big difference in your monthly payments. In fact,
your new mortgage could be less than your old mortgage plus
your monthly payments on the individual debts.
Wow, that sounds foolproof. What could go wrong?
cannot refinance without owning a house (that rules some
people out right there), and you will find that refinancing
is a rather involved process that may require some fees
along the way. It can take a couple of months to get the
paperwork squared away, and in the interim, you still have
to make all of your regular payments. So there are some
hurdles before you start. Then, once you refinance, you have
to change your financial habits and how you manage money.
The biggest danger to a refinancing arrangement is that you
fall back in debt.
How would that happen?
refinancing will let you pay off all of the debts you
consolidated. Suddenly, you have a bunch of empty credit
cards. You may find the arrangement leaves you with a little
more disposable income every month. If you’re not
disciplined, it’s easy to start charging things again. It’s
very tempting to take a little extra cash and blow it on
something … and get other loans. That’s why you need to be
working with a certified credit counselor.
What exactly is a certified credit counselor?
are specially trained professionals who work with people in
debt. Actually, anyone can call himself a credit counselor
or a financial advisor or something like that, so you have
to be careful. There is a federal organization (National
Foundation for Credit Counselors, nfcc.org) that provides
oversight and sets requirements for credit counselors.
Professionals who meet these requirements are known as
certified credit counselors.
Where do I find a certified credit counselor?
online to nfcc.org. The website is easy to navigate, and
there’s a place where you can enter your zip code to see who
is available in your area. You can also see our article on
certified credit counselors and access a government website
as well. It's not hard to find one once you know where to
What do I do when I visit my certified credit counselor?
You’ll make an appointment. The counselor may tell you what
to bring, but generally figure that you need to bring all of
your financial information. Make a list of your various
debts, bring along a pay stub or other information on your
income and bank accounts, and bring a notepad so you can
write down what you talk about.
What does a certified credit counselor actually do for me?
are lots of factors that affect your financial health. Your
counselor’s job is to get to know your particular situation
and then recommend the best options for you. Counselors know
about a lot of financial programs and plans that you
probably have never heard of. They can also assess your
situation objectively. There is no
one-size-fits-all-solution when it comes to debt problems.
Your counselor is going to help guide you to what is going
to work best for you.
How does the certified credit counselor get paid?
Discuss any fees with the counselor before your first
appointment. If you cannot afford a counselor, mention that
when you call. There are sometimes free services available.
Your counselor may be able to save you thousands over the
long haul, so even if a fee is involved, it could be money
well spent. Fees should not be very high. You can even make
a few phone calls and comparison shop before you go.
Let’s come back to debt consolidation options. What is a
home equity loan?
a loan offered by a financial institution that is based on
the equity in your house. Obviously, you have to own a house
What is home equity?
equity is the amount of “profit” you have in your home if
you were to sell it today. For instance, let’s say you have
a mortgage for $200,000 on a house that, conservatively
estimated, would bring $250,000 on the market today. Your
home equity is $50,000.
How does a homeowner get home equity?
equity increases in two main ways, either you pay down the
mortgage or your home value increases. If you have owned
your home for a long time, you generally have built up some
substantial equity because you’ve been paying off the
mortgage plus your home has likely increased in value.
How does the home equity loan work?
a loan you can use to pay off your individual debts. You
then just pay off the home equity loan. The loan is based on
the equity in your home.
What is the advantage of a home equity loan?
depends on how you structure or arrange the home equity
loan. You may find that you can get a lower interest rate
than you’re currently paying on your individual debts, so
your home equity payment is less than the sum of the
payments on your smaller loans. It simplifies things by
giving you one bill. You can arrange to pay it over a long
period of time, which can help ease the burden, too.
So what can go wrong?
the fine print. Both mortgage refinancing and a home equity
loan use your home as collateral, so find out what the
lender can do if you don’t repay promptly. You need to know
those terms. And, like a refinancing loan, you run the risk
of going back into debt if you’re not careful.
How can I avoid future debt?
certified credit counselor can help you learn basic
financial planning. He or she will probably teach you how to
set up a budget, how to stick to your budget, and some
financial strategies to better manage your money. At the end
of the day, it is up to you to make the right decisions.
What if I didn’t get into debt because I was careless? Do I
need to bother with this counseling stuff?
people get into debt because of medical bills or other
emergencies. Some people get into debt because they don’t
know how to manage their money. Either way, you need a
certified credit counselor to help you figure out the best
way out of debt. There are lots of financial programs and
strategies that the average person simply would not know
about. That’s the main role of the counselor. A counselor
will get to know you and your circumstances.
Are there any other types of debt consolidation?
are also regular loans. In simplistic terms, you’re taking
out a new big loan to pay off a bunch of little loans. Loans
can either be secured or unsecured.
What’s a secured loan and how is it different from an
secured loan is made based on something of value that the
lender holds as “collateral.” This means that the lender has
rights to the collateral if you don’t pay back the loan
according to its terms. An unsecured loan is made without
What’s an example of a secured loan?
car loans are secured in that the car finance company can
repossess your car if you don’t pay them. That’s because the
car itself is collateral in such loans.
Is it easy to get a secured loan?
secured loan requires that you have suitable collateral. If
you do, it may be relatively easy to get in that the lender
is not taking a great deal of risk.
What about a line of credit?
Sometimes the loan you get to consolidate your debt comes in
the form of a line of credit. You use your credit to pay off
small debts, then you pay back the credit line. With a line
of credit, you usually get a checkbook so you can write your
checks against the line of credit.
What about companies that say they can negotiate with my
creditors and reduce my debt?
process is called debt negotiation. In most cases, a company
or organization handles your case and works with your
creditors to reach a settlement. Your creditors may agree to
settle the debt for less than you actually owe or to offer
you more favorable terms.
How can I enter into debt negotiation?
very careful about this approach, since it definitely will
impact your credit score. When you negotiate a debt (even if
a company is doing it for you), you are essentially telling
the company you won’t or can’t pay them back according to
the terms of the loan. You are more or less announcing you
are on the brink of bankruptcy. You are making an effort and
paying something (which is why many creditors go along with
this plan) but you are also defaulting. Creditors will
report this to the credit bureau; you are also unlikely to
get credit back with them soon.
How can I find a debt negotiation company?
should only work with a certified credit counselor if you go
this route, because there are many debt negotiation
companies that are not exactly reputable. Don't work with
any debt negotiation outfit or debt relief company that
approaches you. You should find them. Companies that seek
you out may not be reputable organizations.
How could a debt negotiation company scam me?
pretty basic scam is that the debt negotiation company tells
you they’ll take care of your debts and all you have to do
is pay them a certain amount of money each month. They may
even warn you not to contact your creditors. Then, several
months down the road, you find out they haven’t paid or even
talked to your creditors. There are also more sophisticated
What about companies that promise debt relief?
relief is a pretty vague term and it's used by different
people in different ways. Talk to your certified credit
counselor. Your counselor can help you figure out who’s who
and what companies you can trust.
Wouldn’t I be better off just going bankrupt?
Bankruptcy is the most extreme step and really should not be
even considered until all other avenues have been exhausted.
Isn’t bankruptcy the best solution for some people?Bankruptcy is never your best choice. For a very few people,
it can be the only option, but it’s never a “best” anything.
What’s so bad about bankruptcy?
Bankruptcy removes a lot of control of your money and assets
away from you. For instance, you may be forced to sell
certain things to pay your debts. Bankruptcy is very bad
news on your credit report and it stays there for a decade.
Even if you can get back on your feet financially, it will
be hard to re-establish credit for a long time. This means
you should get used to paying cash for everything.
Eventually, you may be able to get a car loan or a mortgage,
but you’ll pay higher interest rates because you’re
considered a high-risk borrower. Since some employers check
credit histories before hiring, bankruptcy can even affect
your chances of getting a new job!
Don’t different states have different laws about bankruptcy?
states have individual laws governing bankruptcy and credit,
plus there are all federal regulations. That’s why you need
a local certified credit counselor.
This sounds overwhelming. Where do I begin?
begin by getting some information. That's why you should
spend some quality time on this site. But don't just stop
here. There are lots of great sources of financial
information online, and they're free. Take some time to
learn what you need to know. Then make an appointment with a
certified credit counselor. You'll need to get your
financial information organized, and you'll probably want to
learn about budgeting and money management (even if you
didn't get in debt because of carelessness, because most of
us could manage our money better than we do). Take it one
step at a time. You probably did not get into financial
trouble overnight, and you won’t get out of debt overnight,
either. The good news is that there are lots of programs out
there that really can help you. People have gotten out of
huge amounts of debt. It takes patience, determination, and
a little bit of knowledge. But it can be done!