Consolidating credit card debt with a loan

by  |  08-Apr-2016 12:17

“People usually wait too long to reach out to a credit counselor, because it’s human nature to try to do it on your own,” says Gail Pridgeon, senior credit counselor at Baltimore-based Guidewell Financial Solutions.A debt management plan typically sets you up to pay off your debt within five years. Counseling agencies are different from debt settlement companies. “If your debt problem is bad enough that you require a debt management plan, then you should also consider making an appointment with a bankruptcy attorney,” says Nerd Wallet personal finance columnist Liz Weston.

You pay the counseling agency, which pays your bills and gets your interest rate reduced or fees waived. Those companies ask you to divert your payments into an account from which they make lump-sum settlements with creditors who haven’t seen a dime in months. “You don’t want to keep struggling with debt that ultimately may not be payable.” Filing for bankruptcy lets you erase your debt and keep some of your possessions, but it typically stays on your credit report for 10 years and affects your ability to get loans or new forms of credit.

Damage to your credit is severe, and personal finance experts and regulators warn against this strategy in the strongest terms. (However, its impact fades over time if you handle new credit responsibly.) In some cases, bankruptcy may be the only long-term option to rebuild your finances.

Some borrowers wind up in worse shape, either because they run up their credit cards again or because their debt remains overwhelming despite the better repayment terms.

Others succeed because debt consolidation is part of a bigger plan to gain control over their finances.

Consolidating multiple loans means you'll have a single payment each month for that combined debt but it may not reduce or pay your debt off sooner.

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