Debt Consolidation 101

Debt consolidation reduces your debt burden by lowering your payments and interest rates. Find out how it works here.

What a Debt Consolidation Service Does

A debt consolidation service is sometimes also referred to as a debt management plan.  A debt consolidation service has established agreements with most major creditors where the negotiated interest rate is generally predetermined.  These creditors are primarily credit card companies but can also include medical and other collection companies.  When you enlist the services of a debt consolidation service, the company will reference their creditor rate table to determine your new payment with your individual creditors.  This rate is almost always lower than what you are paying and what is available to the general public.  If you have many creditors, debt consolidation will simplify your payments by combining them all into one. 

Pros & Cons

A major benefit of debt consolidation applies to people who are currently behind on payments and being harassed by creditors.  As long as you make your monthly debt consolidation payment, this will satisfy your creditors and they will no longer call you to demand payment.  Other benefits include becoming debt-free faster, lower monthly payments, and dramatically reduced interest rates.  One con to debt consolidation is that you have to cancel all credit cards you include in the debt consolidation program.  Depending on company policy, you might be able to make an exception for one card for emergency use only. 

The Costs

Most debt consolidation services charge a commission plus a monthly administration fee.  The commission is usually based on the new monthly payment that your debt consolidation company negotiates for you.  For example, if your new monthly payment were reduced to $200, you would need to pay $400 your first month of enrollment ($200 to your creditors, $200 in commission).  Debt consolidation companies will also charge a monthly administration fee that varies considerably from company to company.  Some companies will charge a flat fee of $10-$40, while others charge a per-creditor fee of around $5. To learn about other debt consolidation services, see our Debt Negotiation page.