Credit Repair 101: Debt Negotiation and Consolidation
Last week we had a post about credit repair strategies
, centered around what you can do if you see inaccuracies on your credit report. What this leaves out are those people who have a bad credit rating because of their own bad behavior - i.e. the credit report is totally accurate, and not very good news. So what about those people who are facing a mountain of debt which may lead to inevitable defaults. This no doubt will make a bad credit rating even worse, but what about those outlets for getting out debt like debt consolidation, debt settlement, and negotiation? Could these things make things worse?
Here's the lowdown.
First a reminder about what these things do:Debt consolidation
: Get a loan to pay off a bunch of smaller loans. This can reduce your interest payments and/or limit the chance of defaults if you only have one bill to pay.Debt settlement
: You agree to pay a lump sum all at once; smaller than your outstanding debt total, but you've got to pay it at one time.Debt negotiation
: Negotiate with your creditors to reduce your overall burden by reducing the interest rate, amount owed, or both.
Negotiation is a trickier situation because a bad debt negotiation service will claim that they've reduced your monthly payments, but when you pay a smaller amount month to month it still registers as a default because it looks like you've paid below the minimum! So be careful with debt negotiation services.
If you do any of these things, you're obviously being proactive about dealing with your debt, but you're also basically admitting that you have a debt problem, which can ding your rating. Really, though, if you're at the point where you need to negotiate your debt to avoid massive defaults, your short term credit rating isn't the biggest of your concerns. First, you need to manage your debt and then the credit rating will take care of itself. It may take many long months to regain its stature, but if you're able to pay down your debt, this is a good trade-off.
What this should tell you is that if you're not facing a huge amount of debt difficulty, messing around with debt negotiation should not be your first recourse. Instead, consolidation is a safer route. In some cases, consolidation will be combined with negotiation, so that you pay off all your debts at once for a lower fee--but, again, be careful because a consolidation/negotiation service may have high fees that won't make the reduced debt load all that worthwhile. Not to paint negotiation in a totally bad light, but there are services out there that prey on the desperate, so watch out.
The problem is that if you're really deep in debt, getting a debt consolidation loan is not all that easy--certainly not for a low APR that makes the loan worthwhile. Why should you be rewarded with a good APR if you're deep in debt? Still, even if you get a loan that has a higher APR and lower payments than you're paying currently, this could (in theory
) be better than defaulting continuously. But, be certain, it's going to cost you more in the long run.
The main way to get one of these loans is to borrow off your house because then you can secure a lower rate. If you're not a homeowner, however, there is no perfect solution.
The moral of this story: don't get to this point. I know that's not much of a help, but the thing about bad credit is that it makes problems snowball. If you do reach this point, you'll have to be prepared to wait several years before your credit rating improves in any sort of dramatic way. It's not as bad as a bankruptcy, which will be with you seven years or more, but it's most certainly something to avoid.