Clearing misconceptions with debt consolidation

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If you are like most Australians who are drowning in debt, it may have crossed your mind to consolidate your debts. Even though there are lots of advantages from doing this, there are also very many myths and misconceptions about debt consolidation. These include but are not limited to the following;

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Myth # 1 – A lender is always out there to bail you out 

Advertising campaigns have led many people to wrongly believe that it is possible to get virtually all debts consolidated into low interest payment plans. This is not true, just like any service out there; some conditions do exist and must therefore be met before being considered for debt consolidation.

If you are seeking consolidation through a bank, then you must have a good credit report before you can be considered. Non-bank lenders usually have more flexible guidelines, but they also don’t accept all potential clients since they consider the risk of default as well. To be on a good stead with either a non-bank or bank lender then it is advisable to be current with your payments and make an effort to repay your loans over the last several months. Some proof that you are trying to pay off your loans will go a long way in helping you consolidate your loan into one easy repayment.

Myth # 2 – Debt Consolidation will damage your credit score 

It is important to note that making use of a debt consolidation facility to offset your debts won’t significantly impact your overall score if you do it right and make your repayments. This is mainly driven by the fact that when calculating your credit score, a very small part of the overall credit score is effected or derived from what’s known as new credit, since whether you are going to pay off that particular loan is still unknown.

The most significant factors that affect your overall credit score is whether you are paying your loans on time, the length of the credit score and how much money you owe your creditors. It is worth mentioning though that if you have opened up several new credit lines then this can be used against you as it shows that you are facing some financial difficulties.

Myth # 3- Credit Counseling and Debt consolidation are the same 

Even though these two are usually discussed in a similar context, they are quite different. Whereas both are meant for people who are facing some financial challenges, credit counseling is advisory in nature, helping you to decide on the type of debt agreement to use or how to align your payments etc. it is basically education on how to faithfully pay off your loans. A counselor may assist you with a written debt management plan, budgeting advice and maybe even negotiate for lower rate and go ahead offset bills on behalf. But they are usually not inclined towards doing that and when they do it, they do it at higher rates. Debt consolidation on the other hand is more practical, and involves combining multiple loans together under a singular payment program, normally at a lower rate.

Myth # 4 – Debt Consolidation will immediately set you free from debt

Although it is true that consolidation of debts is an efficient and effective tool for managing and quickly paying off your debts, it is not a magic wand. You must be ready to make some financial adjustments and show the necessary commitment to clear off the debts. It takes a lot of hard work on your part to pay off the debts. In reality, your creditors have simply taken a backseat after getting some commitment from your consolidation company.

Myth # 5- Consolidation of Debt is a big scam

The truth is that there are several scams around the debt consolidation business, with quite a number of people burning their finances and messing up their credit scores in the process. It is also true that not all consolidation plans or loans will save you a wad of cash. But at the same time, it is also true to assert that there are very many legitimate, effective and honest debt consolidation companies out there who will go through your debt agreements, debt repayment plans and any other relevant factors to ensure that you get a good debt consolidation plan for your loan.

The key is to do your research properly and thoroughly, talk to someone who has or is going through the same problem and get to know the company or firm they are using and start from there. This is one area where word of mouth marketing can save you quite a bundle; don’t just rely on online reviews and comments from anonymous users who cannot be verified.