Debt Consolidation Programs

How it Works

Step 1.

Talk to one of our certified debt consolidation counselors.

Step 2.

Our preset terms with creditors can get you lower interest rates and payments.

Step 3.

Make just one simple monthly payment to us and we’ll distribute it to your creditors for you.

When you’ve got more debt than you can keep up with, and you’re having a hard time making your monthly payments, a debt consolidation program can offer relief.

At Debt Reduction Services, we offer help for people struggling with credit card debt and other financial difficulties so that they can get back in control of their finances. Here you’ll learn all about debt consolidation programs, and how they work, so that you can decide if enrolling in one is right for you.

What is a Debt Consolidation Program?

This typically involves a nonprofit company that manages the plan using predetermined benefits with your creditors. These benefits include things such as waived penalties and fees and/or a lower interest rates. 

You will then make a single monthly payment to the nonprofit company, which will distribute the funds to your original lender.

The primary goal is to help you eliminate your debt for good and to save you money in the process, after which all of your accounts would be reported as “paid-as-agreed.”

Differences between a Debt Consolidation Program and a Debt Consolidation Loan

While the two terms are often confused and interchanged, there is a significant difference between the two (you can learn even more about how debt consolidation works here).

A consolidation loan (as opposed to a program) is exactly that, a new loan that gets used to pay off other loans or forms of debt. A debt consolidation program however is a service which:

• offers lower interest rates and monthly minimums
• stops late and over-limit fees
• pays off the debts over time

They also differ in that a debt consolidation program is typically done through a nonprofit credit counseling agency and includes financial education (including how to budget) to ensure the client is empowered to make healthier decisions for financial stability long after they finish repaying their debts.

Aside from those main differences, there are also some similarities shared by programs and loans. These include making a single monthly payment instead of multiple payments, and likely having a lower monthly payment than you had before.

If you don’t know which is right for you, credit counseling can help. Credit counselors are certified professionals, who know these programs inside and out. They will walk you through your finances answering any questions, giving advice and finally making a recommendation based on the information you provide.

Types of Debt that Can Be Consolidated Using a Debt Consolidation Program

Debt consolidation (management) programs are intended to help people with their unsecured debts (debt that is not secured by collateral, i.e. a house or a car). Credit card debt is the most commonly addressed through a DMP. However, almost all types of unsecured debt can be addressed including past medical bills, debt in collections, personal or payday loans, and repossessions.

Mortgages, car loans, or home equity lines of credit are all secured debts and therefore cannot be enrolled in a debt consolidation program.

Will a Debt Consolidation Program Hurt Your Credit Score?

Participating in a DMP in order to consolidate your debt does not directly affect your credit score, but a temporary note may be made on your credit report by your current creditors. This simply informs other creditors of your attempt to repay your debt and discourages them from issuing you any new accounts, lines of credit, or loans that may detract from your efforts.

Once you have completed the program, this notation is required to be removed. In certain circumstances, when a client enrolls in our DMP and either they or their creditors’ close credit accounts, the client may see a short-term drop in credit score partly due to a change in the ratio of current balance to available credit limit. However, this dip is quickly recovered because of on-time payments which lower total debt owed.

Advantages and Disadvantages of Debt Consolidation Programs

Advantages:

• Single Monthly Payment: Consolidate multiple bills into one manageable monthly payment.
• Lower Interest Rates: Benefit from typically lower interest rates compared to individual creditor rates.
• Lower Minimum Payments: Reduced minimum payments to each creditor.
• Faster Debt Payoff: Potentially pay off your debt faster due to lower payments.
• Better Interest Rates for Severe Debt: Consumers with severe credit card debt often get better interest rates through a program compared to a consolidation loan.
• Credit Score Not a Factor: Unlike consolidation loans, a Debt Management Program (DMP) does not consider your credit score for eligibility. This is because it does not involve obtaining a new loan, allowing those with poor credit scores due to existing debt struggles to qualify.

Disadvantages:

• Extended Repayment Period: May result in a longer repayment period, increasing the total interest paid over time.
• Fees and Costs: Some programs charge fees, which can add to the overall cost. It’s important to compare fees among organizations before selecting one, as every dollar matters when you’re struggling to make monthly payments.
• Impact on Credit Score: Participation in a debt consolidation program can negatively impact your credit score.
• Not All Debts Covered: Certain types of debt, such as student loans or secured debts, may not be eligible for consolidation.
• Potential for New Debt: Without proper financial discipline, there’s a risk of accumulating new debt while paying off the consolidated one.

You can learn more about debt consolidation programs for bad credit here.

Getting Started

Debt consolidation programs typically start by having a discussion with a certified credit counselor to determine whether enrolling is right for you. If you qualify for the program and decide to enroll, the consolidation debt program will take over the repayment of all your outstanding debts you choose to include. You can start right away after the file process is complete. This is usually done within 7 days.

Again, your debts will continue to exist where they are now. You’re not getting a new loan or moving the debt around, but now you’ll make just one monthly payment, and the funds will then be distributed to your various creditors. The company you choose for your debt consolidation program will then communicate with your creditors during the setup process and continue to do so as the program progresses.