Credit Consolidation

Credit consolidation can be very tempting for people who are desperate to rid themselves of their debt. After all credit consolidation sounds like a good deal: one payment to one company. This single payment can be to a loan that you took out to cover your existing debt, to a credit counseling or credit consolidation company or to a credit card that you got with a high enough limit to pay off the rest of your debt. It sounds too good to be true and as is usually the case with such deals: it often is actually too good to be true. Here is the lowdown on credit consolidation and why it should be avoided.

If you decide to try for a loan or a balance-transfer credit card, you should know the risks. Often these loans and credit cards come with a ridiculously high interest rate and you can end up paying up to one and a half to twice as much as you originally owed just from the interest alone. Also, the minimum payment on these loans and credit cards will be more than your original minimum payments to your original accounts. If you were having problems making those payments, you will have trouble making the one larger payment.

Credit consolidation companies are often out to make a profit off of the backs of desperate people. These companies promise that for a low introductory fee (which is often more than the minimum payments you could make on your debt accounts for at least two or three months) they will take over your debt. They promise to work with your original debtors and come up with an amount for your total debt and then you make payments to the company who then turns around and disburses the payment to the original debtors. These companies often promise that they can cut your debt in half, when really what they do is increase your credit risk to future companies.

You see, just because you get a loan or a credit card or work with a credit consolidation company that doesn't mean the original debt accounts suddenly get wiped off of your credit history. In fact not only will the original accounts still be listed, but your credit history will clearly show the balance transfers and the new account (loan, etc) that is maxed out within a few days of opening it. This is an incredible blow for your credit history to take. Also, in many places working with a credit consolidation company is basically the same thing as declaring chapter seven bankruptcy. Bankruptcy is the worst thing you can ever do to your credit history.

Credit consolidation can be very tempting, especially if you are desperate to get rid of your debt. Unfortunately, the promises are mostly fronts to lure you in so those companies can make a profit off of you. The best way to fix your credit history is through a steady repayment history and making sure your credit report is free of mistakes.

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