Debt Consolidation
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How Do Debt Consolidation Programs Work?

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Content was accurate at the time of publication.

If you’re feeling overwhelmed by debt, a debt consolidation plan can act as a life vest, helping you reach the shores of financial stability. Debt consolidation plans can help you manage large amounts of debt more easily and may even help save you money in the long run.

What is a debt consolidation program?

The precise definition of a debt consolidation program can vary based on what a company offers. Essentially, though, a debt consolidation program is a type of service that helps people manage large amounts of debt.

Debt management plan

Debt management plans (DMPs) are a form of repayment created by credit counselors to help you cut down on multiple debts. Credit counselors are financial professionals that help people better manage their money and typically work for nonprofits.

Credit counselors can reach out to your creditors on your behalf and negotiate with them to come up with a DMP that works for you. For instance, they may negotiate with your creditors to lower your interest rates or dismiss fees.

With this type of plan, you’ll make a single monthly payment to the credit counseling organization, which will distribute the funds to your creditors. You may also have to pay a small, monthly fee to the credit counseling organization.

The benefits of using a debt management plan can include:
A single, potentially lower, monthly payment
Lower interest rates on the included accounts
Bringing past-due accounts current
Stopping collection calls about the accounts
Waiving late and over-limit fees

Generally, if you follow through with the DMP, you can pay off your debts within three to five years.

Debt settlement

Debt settlement is a tactic consumers can use to renegotiate their debt if they get far behind on payments. To do this, you can start by offering to pay a certain amount of cents per dollar and negotiate from there. Other parts of the settlement may include the dismissal of fees, lower interest rates or smaller minimum monthly payments.

While you can hire a debt settlement company to do this for you, you can also do this yourself for free. In fact, in some cases, you may have to because there are lenders out there that won’t work with debt settlement companies.

Keep in mind that your creditors are under no obligation to settle your debts. If you are successful at renegotiating, settled debts can appear on your credit reports for up to seven years and may make it challenging to borrow in the near future.

Debt consolidation loan

A debt consolidation loan is a type of unsecured personal loan that allows borrowers to roll multiple loans into a single loan. Some lenders may send your personal loan funds directly to your original creditors instead of your bank account.

Debt consolidation loans come with fixed annual percentage rates (APRs) and minimum monthly payments. This means your monthly payments will not vary from month to month. Ideally, with this type of loan, you’ll want to qualify for a lower interest rate than you’re already paying so you can save money in the long run.

There are many pros and cons to debt consolidation loans, so consider them before deciding if this route is for you.

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How do debt consolidation programs work?

Debt consolidation programs can take many forms: DMP, debt settlement or debt consolidation loan. If you’re struggling with debt, however, a good place to start could be with a DMP. This is because unlike the other two options, it doesn’t directly impact your credit. Follow these steps to get started:

Meet with a credit counselor

The first step is to meet with a credit counselor, which you may be able to do in person, over the phone or online. Initial sessions are often free. Be prepared to discuss your personal finances and answer the counselor’s questions. By the end, the counselor may present you with different options based on your circumstances. These could include a DMP, but a DMP also might not be the best option in your case.

Wait for the counselor to get back to you

If you decide to sign up for a DMP, your credit counselor will first need to reach out to your current creditors. They will try to negotiate on your behalf to improve your loan terms or get fees waived. The counselor will then discuss the results and what your DMP will look like with you.

Sign up for the DMP

If you agree to the plan, you may need to pay a one-time setup fee and agree to a monthly fee. Your new monthly payment (including the fee) would be sent to the counseling agency each month. It will then send the appropriate payments to each of your creditors.

Close or stop using certain credit accounts

You may need to close all the credit cards that are included in your DMP and agree to stop using other lines of credit. Your creditors may also monitor your credit report to see if you open new accounts or use other cards and cancel your DMP benefits if they notice you’re not sticking with the agreement.

Make your monthly payment

Continue making your monthly payment until you’ve paid off all the accounts. Missing a payment could increase your interest rates and monthly payments again, and late payments could be reported to the credit bureaus. If you think you won’t be able to afford a payment, contact your credit counselor immediately to see if they can help.

Debt consolidation vs. debt management

A DMP is one type of debt consolidation program, but another popular option is to take out a new loan to pay off your current debts.

Debt consolidation loans are often unsecured personal loans, although some people will borrow against their home or another valuable asset to consolidate their other debts.

DMPs and debt consolidation loans share a few similarities:

  • You’ll make a single payment each month
  • Your monthly payment may decrease
  • You could save money if your interest rate is lower


Debt consolidation loanDebt management plan
Requires strong credit to qualify for a loan with competitive interest ratesDoes not require strong credit to qualify
Some lenders charge an origination fee, plus interestMay charge you a monthly fee
You’ll have to manage the process on your ownA credit counselor will help set up and manage the program
You can consolidate secured and unsecured loansGenerally only works with unsecured loans

Choosing between debt consolidation and debt management

A nonprofit credit counseling agency’s debt consolidation program may be the best option if you’re struggling to afford your bills (or already have past-due accounts) and are looking for assistance. Having a trained professional who can negotiate on your behalf at an affordable cost can be relieving and rewarding.

Because you’re not taking out a new loan, your credit isn’t a factor. And although you’ll need enough income to pay your bills, living expenses and the monthly DMP payment, you may qualify for many of the benefits — plus waived fees — if you have a low income.

On the other hand, if you have lots of high-interest debt but also have a decent income and good credit, a debt consolidation loan might be a better route. Some lenders don’t charge an origination fee, and you may be able to get a debt consolidation loan at a much lower rate than you’re paying on your credit cards. You’ll also be able to keep your credit cards and open new accounts when needed.

Where to find a debt consolidation program

There are no government debt consolidation programs for paying off credit card debt, but you can still find trustworthy agencies.

Start your search for a DMP by looking for organizations that are part of either the National Foundation for Credit Counseling or the Financial Counseling Association of America. These two associations certify credit counselors, and the member agencies and organizations must be nonprofits to maintain their association.

If you prefer to meet with a counselor in person, there may only be a few options depending on where you live. However, many credit counseling organizations also offer online or phone appointments.

An initial consultation or call may be free, so take the opportunity to interview the counselor and make sure it’s someone you want to work with. You can also search for reviews of the credit counseling organizations.

How a debt consolidation program impacts your credit

How a debt consolidation program affects your credit depends on where your credit already sits and which plan you decide to follow.

  • Debt management plan: This option won’t directly impact your credit score. However, as you work with a credit counselor, your credit score may improve over time.
  • Debt settlement: Any debt settlement you agree to can show up on your credit report. It can stay on your report for up to seven years. While it may not be as negative as a bankruptcy, debt settlement on your credit report may make it challenging for future lending opportunities.
  • Debt consolidation loan: If you take out a debt consolidation loan, a hard credit pull can show up on your credit reports and cause your credit score to go down by up to five points. This can stay on your report for up to two years. However, as you repay your debt consolidation loan, your credit score may gradually increase as your credit utilization rate decreases.

If you’re overwhelmed by debt, a debt consolidation program may help. However, it’s important to choose the option that best fits your financial position. For instance, a debt consolidation loan may work for you if you have a steady income and good credit. If you have a low credit score, it may be a better option to settle with your creditors or go to a credit counselor.

If you take out a debt consolidation loan, your lender will likely run a hard credit pull on you. This allows creditors to see your credit report and decide whether to give you a loan. However, it can decrease your credit by up to five points and stay on your credit report for two years.

The required qualifications for a debt consolidation loan depends on the lender you choose. Common criteria lenders consider are your credit score, payment history, collection accounts, late payments, debt-to-income ratio and credit utilization rate. Generally, you need to have at least a 670 credit score to get a debt consolidation loan.

If you’re unable to keep up with your bills, you’ll eventually need to come up with a plan to either repay, settle or discharge your debts. A debt consolidation program can include entering into a debt management plan, taking out a debt consolidation loan or settling your debt with your creditors. In a serious scenario, you may have to even consider bankruptcy.