If you’ve been trying to take the debt burden off your shoulders, you may have considered debt consolidation, which is probably the most viable option for most people. Of course, debt consolidation is an excellent way to keep a check on your debts. But there are a few things you need to be familiar with before you strike a deal.
Debt is something that almost every person has regardless of his or her financial status. The rich have millions of dollars in debt. And the middle class has a few thousand or hundreds, and the others have tens of dollars. So, as you can see, everyone owes something to someone when it comes to money.
Just because you have debts doesn’t mean you’re poor or you have to worry. You just have to manage your finances in a better way. Let us now take a look at some myths regarding debt consolidation.
Six biggest debt consolidation myths
Myth 1: Debt consolidation is fake or a scam
Debt consolidation is legit, and it can even save you some money apart from paying off your debts. However, this industry is unfortunately full of scams. After the Great Recession in 2008, scammers found out that many people have debts. So they took advantage of this and started fake companies.
To avoid scammers, you should make sure that the debt consolidation company you plan to work with has a solid and good reputation. Those companies that have been in business before 2008 are usually the most reliable ones. This, however, does not mean that the ones established after the Great Recession are all scams.
You just need to do a bit of research before making a deal with them. If you find that the company is not transparent when it comes to sharing information, asks for money constantly, then you should be suspicious. In addition, if they are pushy and aggressive, these are signs that the company is a scam.
Myth 2: Debt consolidation and debt management are same things.
Many people do not realize that debt consolidation and debt management are two different things. Of course, these two are pretty similar as both aim to relieve or lessen debtors’ debts, but they’re not the same. Let us take a look at the difference between debt management and debt consolidation.
A debt management program is an approach that seeks to help you manage your finances better. It involves working with financial experts from credit counseling services. Once they take a review of your current financial status, they will help you come up with the best plan so you can pay your debts efficiently. The credit counselor may even try to negotiate a lower interest rate on your behalf. Unlike debt consolidation, debt management does not require taking an additional loan or credit.
Debt consolidation involves concentrating all your debt repayment into a single monthly payment. You can achieve this by taking a personal loan at a lower interest rate. Or through a balance transfer credit card where all of your existing credit cards are concentrated into a single. Debt consolidation does not require credit counselors and can be done on your own. For this, you may have to apply for a new account or a new credit card.
Myth 3: Debt consolidation kills your credit score.
The most critical factors that hurt your credit score are your payment history and the amount of credit you have. Let’s say your payment history is excellent, and you want to apply for a loan. In this case, you don’t have to worry much about your score as you can quickly recover from it. Since you’re applying for new credit, aka, debt consolidation loan, your credit score may fall just a bit.
You may, however, land yourself in a terrible situation if you do not know the advantages and disadvantages of taking a debt consolidation loan in the first place. To heal your credit score, you’ll have to reduce your spending and try not to accumulate more debts.
So, in short, debt consolidation may or may not hurt your credit score. Whether you take a loan or not, your credit score will continue to fall if you don’t change your spending habits.
Myth 4: Debt consolidation worsens your debt burden.
Some people might have experienced this. This is mainly because of the common mistakes that most people make when trying to get out of a financial crisis. What needs to be understood is that a debt consolidation loan will not solve all your money problems if you are not willing to change your lavish lifestyle, if you’re into it.
For instance, minimizing your shopping list will significantly help you save some money. You should also buy only the things that you need and avoid purchasing the less necessary, costly stuff.
Myth 5: Debt settlement is cheaper than debt consolidation.
In theory, debt settlement sounds a lot better. But once you get to know how it works, you will see that it’s a lot risky. Debt settlement involves a tactic that halts all payments for a specific time in order to negotiate a better deal with the creditors.
This is a time-consuming process, and you know that withholding your payments can severely affect your credit score. And by delaying your payment, you may even be sued. Also, it’s very risky because you can never be sure that your creditors will accept your offer.
Myth 6: A formal program is a must to get out of debts.
This is not true because you can manage your finances and your debts on your own. But it involves a lot of hard work. If you’re good at persuading people and willing to make a lot of phone calls, some creditors may enlist you into their lower interest programs.
The most important of all is that you should keep your spending minimal whether you’re into a formal program or not. This is the only way to steer your way out of debts unless you win a lottery or inherit a fortune from a rich relative.