Bad Debt Consolidation

When your debt becomes a bad debt (i.e. the one that’s unlikely to be paid out) it becomes extremely difficult to find a lender who’d agree to borrow you a debt consolidation loan. In general, debt consolidation loans are considered to be a high risk group of loans. This is due to the sad statistics saying that most debtors go even deeper in debt after their first consolidation.

Among the bad ideas when dealing with debt consolidation is taking a hard-money debt consolidation loan.

The biggest myth about consolidation loans is that they are very easy to get. I imagine if you decided you need a debt consolidation loan it’s because you have already missed one or two payments and your credit history is far from perfect. So, here you have a major problem.

Debt Consolidation Biggest Mistakes – Part I. Myths

If you find yourself in a sad position, in debt up to your neck and see no way out, you probably thought about debt consolidation already. In this series of articles we will discuss the slippery side of debt consolidation – debt consolidation loans, balance transfers and some other options that sound easy, but hide dangers within.

1. In case you spend more than 50 percent of your credit card limit each month, this fact indicates to the Credit Bureau that you can’t afford you lifestyle and don’t have enough cash on hand to meet your daily expenses. You will be moved to a high credit risk category and cut your credit score by 60-70 points. 
2. Miss one or two payments on your credit card debt and your creditor increases your interest rate to a skyrocketing number of 27-30 percent! 

Advantages of Debt Management

A wise debt management can significantly lower your monthly payment without damaging your credit. At some stage of your life you realize that you are no longer able to pay for your daily expenses along with the huge pile of debts. It is time you go for a debt management plan. It will help you get rid of debts by working out a more affordable payment plan.

Let’s see what a debt management plan is. Usually, a specialized credit counseling agency or a debt management company offers a debt management plan when they see that a strict budget planning is not enough for you to pay out your debts. A negotiator then deals with your creditors in order to agree on a more affordable payment plan and lower interest rates for your debts. Thus, your monthly pay outs are considerably lower and you can pay them in time. See the list of debts that undergo a debt management plan.

There are unsecured debts, for example, credit card bills, medical bills, payday loans and student loans that undergo a debt management plan. Nevertheless, some student loans and payday loans are not included in debt management plans. Here’s the list of debt occasions when a debt management plan is a viable option for you: 

• You are no longer able to manage your multiple bills effectively. 
• You have already tried the self repayment plan and it has failed to help you manage your payments better.
• You experience financial crisis and want to get out of debt.
• You are being harassed by creditor calls and wish to stop it.
• You wish to lower the monthly interest rates of your debts.

In case you wonder if consolidating your debts can hurt your credit score – you’ll find this article useful. Let’s see. By itself, debt consolidation shouldn’t hurt your credit, in case if you have made your payments on time. If you have missed a couple of payments and then enroll in a debt consolidation and have a lower interest rate agreed with your creditors, then your credit score should improve, because the total amount of debt you owe will be lower. However, in case you apply with too many lenders at once, then those applications could hurt your credit score. Your credit history has the greatest influence on your credit score – how regularly have you been paying out your debts throughout your credit life (this fact occupies the whole lot of 35 percent in calculating your credit score). The other 30 percent goes to the amount you owe, so in case the debt consolidation lowers the total amount you owe, then it sure is a good thing. Another 15 percent is the period of how long have you had these debts, the types of credit (10 percent). The only way a debt consolidation may hurt your credit score is if it is added as a new debt.