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Debt consolidation? Good or bad?

My sister has about $12-15 thousand dollars in credit card debt. She is looking into consolidating through one of those companies, but read some where that it is not worth it.
So what have your experiences been with it and would you recommend it. Does it effect your credit in a bad way?
She is drowning in bills and needs to do something!

 
SleepingBeautee

Asked by SleepingBeautee at 3:51 PM on Oct. 19, 2010 in Money & Work

Level 45 (192,101 Credits)
This question is closed.
Answers (10)
  • Oh, and as for my credit...it helped it a lot.
    LovingSAHMommy

    Answer by LovingSAHMommy at 5:06 PM on Oct. 19, 2010

  • I haven't had to do it, but I can see where in some situations, it can be beneficial. From what I understand, you wouldn't be able to open any new accounts, but then again, you probably shouldn't anyway if you're in a situation like that... A friend of mine did it, and it did help her get her finances under control. Just make sure your sister goes with a reputable company, I'm sure a lot of them are straight up scams.
    Anouck

    Answer by Anouck at 3:53 PM on Oct. 19, 2010

  • We consolidated about 40K about 4 years ago(yep we made huge financial mistakes).It worked out really well for us and we were able to settle for much less than we owed because the debt consolidation company worked with the credit card companies. Obviously lenders don't like to see it, but it didn't affect us at all. Since our debt consolidation (two years after we paid it off) we have borrowed for a home and we were able to borrow as much as we wanted(within reason of our income). We also borrowed for furniture and the guy who sold us our furniture said, "they must like you, most people don't get approved for this much." So it didn't seem to affect us.
    Anouck is right about a lot of companies being scams or some go under and then you get no credit. So have her find a reputable one.
    theutilitarian

    Answer by theutilitarian at 4:04 PM on Oct. 19, 2010

  • I did and it worked out GREAT for me. I went through CCC, and they don't give you a loan to pay it off, then consolidate it like some companies. They simply consolidate it, negotiate lower interest rates with the companies, then you pay CCC monthly. I paid off in 2 years what would have taken me almost 13 years to pay off had I done it on my own. They only charge you a $50 start-up fee, and I think it was $10 a month. I highly recommend it!
    LovingSAHMommy

    Answer by LovingSAHMommy at 5:06 PM on Oct. 19, 2010

  • I'd think a consolidation loan with her bank would be far better than going through what could be a bad company that charges out the wahzoo for interest. Some of them make you pay into a "savings account" in addition to paying your monthly obligations and when the person has enough in there, the company will try to work with the creditors. We took out a consolidation loan a few months ago through our credit union and it has been nice to only pay one bill towards one bank.
    Izsarejman

    Answer by Izsarejman at 4:09 PM on Oct. 19, 2010

  • It really is best to deal with a local credit union or bank that you already have a relationship with. They are more likely to give you a fair deal. Make sure she reads all the fine print before signing anything. There can be severe consequences for not making the payments.
    elizabr

    Answer by elizabr at 4:49 PM on Oct. 19, 2010

  • I haven't done it personally but from what I've studied and seen- it seems like a lot of people consolidate low interest debt with high interest debt. When all is said and done they don't really save much as far as interest goes. Sometimes the payment is lower, but that's because they change the terms from you paying off the debt in say 5 years, to it taking you 10 or 15 years. Does that make sense?

    The biggest problem however is that people will consolidate their debt and then go right back out there and max out their credit cards again. Instead of having $15,000 in high interest debt they end up with $15,000 on credit cards and then $15,000 on a consolidation loan.

    Continue:
    Erica_Smerica

    Answer by Erica_Smerica at 1:18 AM on Oct. 20, 2010

  • The problem isn't the interest rate, it's what made them go into debt in the first place. I'm assuming it was lifestyle. They probably didn't have an emergency fund, or a budget, and were living beyond their means. Maybe that wasn't the case here.

    A better help for them would probably be Dave Ramsey's, My Total Money Makeover. No it's not a cure all. It's a lot of hard work to get out of debt, but the book is motivational and you can check it out at the library for free.

    ETA: The other problem is that having a lower interest rate can make them content with the debt. Seeing a credit card interest rate at 29.99% might make them mad. They might do some crazy things like sell stuff, get another part time job to get rid of the debt, cut life style, stop eating out etc. But a low interest rate at say 8%... that could just sit there for decades if they aren't careful.

    Hope that helps!
    Erica_Smerica

    Answer by Erica_Smerica at 1:22 AM on Oct. 20, 2010

  • I've never used a consolidation company and was denied by my credit union for a consolidation loan (this was about four years ago). The best thing she should do is figure out which credit card has the highest APR. That's the card she should start paying down FIRST. When that one is paid off, go to the one with the next highest APR and work on that one until she gets to the last card. It takes a long time to get it worked out, but it's possible. If she can swing about $310/month to put toward credit card bills, she should be completely credit card debt free in about five to six years. I had a car loan from 2005 until this year for roughly $15K. I paid them $310/month for five years and the loan is now paid off.
    _Tam_

    Answer by _Tam_ at 9:28 AM on Oct. 20, 2010

  • I would say it's worth it so long as it is through a reputable company or bank.
    HotMama330

    Answer by HotMama330 at 2:55 PM on Oct. 20, 2010

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