How Debt Consolidation Works

If you are considering taking out a debt consolidation loan or working with a professional company to have your debt consolidated for you, it's a good idea for you to be aware of the rules and guidelines regarding such a consolidation. You need to be aware of what you can expect from the consolidation company and of your rights and responsibilities.

Just as in any business, state laws may vary in relation to debt consolidation; however, there are three basic steps that are almost always adhered to:

1) Know what you Owe

When you work with a debt counselor, the first question that will come up is how much you actually owe and to whom. Many people don't know or are so overwhelmed that they don't want to know. To get yourself on the road to financial recovery, it is crucial to know how much debt you're carrying and at what interest rates. Pull out all your bills and carefully chart all of the information onto a spreadsheet like excel (if you are computer savvy), or simply list them on a piece of paper.
Next, get your credit report. You can get one free report each year from each of the three credit bureaus-so three total. The wise thing to do is to get one every four months. Not only is the credit report helpful for your debt counselor, but you will find it handy. For example, you may find open credit on your report that you had forgotten about (a department store credit that you opened and then never used, for example). You may discover ID theft and be able to stop it before it gets out of hand. Finally, you can contest erroneous information.

To get a free report, go to the Federal Trade Commission website,

Print out the form, fill it out and mail it to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
Or call toll-free: 877-322-8228.

Credit reports can also be purchased from one of the three credit-reporting agencies:

  • Equifax: 888-766-0008 or

  • Experian: 888-397-3742 or

  • TransUnion: 800-680-7289 or

Bringing a list of your outstanding debt and your credit report to a debt counselor will make things go a lot smoother. This information will not only help you understand exactly what you are up against in the way of debt, but will also help the consolidation company determine your monthly payment and the amount of commission you can expect to pay for the consolidation service.

2) Negotiating your Payments

A good debt consolidator will only suggest that you pay what you can realistically afford per month. Often, after they have gone through the information you have provided, the debt consolidation company will charge an initial fee to get you started. Make sure you are aware of how much you will be paying - not only per month, but in total interest.

Rather than charging an initial fee, some debt consolidators build in a fee as part of the monthly payment you make to them. It's usually about 10% of the payment. Again, before you sign on with a debt consolidator, make sure you know everything- how much you will be paying a month, how many months you will be paying them, the interest that you will be paying, and the fees that will be charged.

3) Making the Payments

When you consolidate all of your debt into one simple payment a month, you will be amazed at how much easier your life will be. You simply write a single check per month and the debt consolidation company in turn distributes that money to your creditors as per the agreement that was reached with them. It's important, however, that you check in with the debt consolidator frequently to make sure the payments are being processed in a timely manner.

One final note, make sure that you work out with the consolidation company how to keep one credit card in case of emergency or for renting a car or checking in a flight; but once you make that agreement, it's up to you to stay disciplined and ONLY use the card when you absolutely need it. The idea here is to get you out of debt and keep you out of debt.

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