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While it's important for you to get a handle on your debt, how you go about it is just as important. Here are 10 myths about debt consolidation and the truth about them. If you are considering debt-consolidation options, avoid these misrepresentations:
1. Credit counseling and debt management program are the same
Credit counseling is an organization that helps consumers to develop a budget plan and set the discipline to make constant payments to clear their debt loans. It is more on educational function that teach the consumers on how to handle their debt issues.
Whereas, debt-management program (DMP) is a tool in the debt solution kit. It helps you to collect all your debt payments and distribute the payments to your creditors By enrolling into a debt management program, it will ensure you pay your payment on time until your accounts stand at zero.
Commonly, credit counseling will introduce to you a debt management program to ensure you learn how to manage your debt using debt management program as the tool to resolve your debt issue.
2. Credit counselors can cut your monthly payments in half
In actually fact, credit counselors help you to make you account statement stay at current. For example, if you miss two $200 debt payments; on the third month, you should pay $600 to make your account stay at current else account is overdue. Hence, credit counselor will help you to negotiate with your creditors to reset you payment to $200 and your account will reset to current so that you are not at overdue status. Indirectly, you monthly payment is reduced from $600 to $200 but in actually fact, you monthly payment still remain the same which is $200.
3. Some companies offer lower interest rates than others
Any quotes that fall within prime minus 75 basis points to prime plus 2 percent are reserved for those who make the A credit list. Those lower down the credit spectrum can expect to strike deals for prime plus 4 percent or 5 percent, not to mention a point or two in fees. The rule of thumb: If 90 percent of the lenders are advertising a 5.75 percentage rate, the loan shark waving even a 5.25 should send up a red flag.
4. Some agencies can negotiate lower DMP payments than others.
That would be true if these debt-management programs involved negotiation. Unfortunately most of them don’t. If a counselor indicates differently, you are in the clutches of a debt-settlement program. This version accepts your monthly lump-sum payments, but holds that money until creditors scream. At that point, the debt-settlement personnel negotiate to repay cents on the dollar. Your credit rating will be jeopardized.
5. You need a formal program to get out of debt.
Many creditors will enroll you in their special reduced-interest programs if you approach them as an individual. The pain comes in making all those phone calls and knowing what to ask for.
Home equity lines don't require third-party guidance, nor does refinancing your first mortgage to get your hands on a lump sum of cash. On the flip side, these options still require spending discipline on your end lest you wind up with a mortgage payment, home equity line invoice and another $10,000 credit card debt six months down the road. This time, your house is on the line.
6. DMP helps your credit rating.
If you've missed payments and it already shows on your report, credit counseling won't make it worse. That's when a DMP can improve some situations, as creditors sometimes applaud that you're finally taking steps to handle debt appropriately.
7. Bankruptcy is no big deal
If you file Chapter 7 - exoneration of all debt -- the window is nearly 10 years. With Chapter 13 -- reorganization of debt -- that seven-year clock starts ticking after you pay off the debt. So if you need five years to get back on your feet, assume this cloud follows you for 12 years.
Employers look at credit reports, and occasionally refuse to hire based on what they find. If you deny bankruptcy on many forms, you can be held accountable later for lying on an application. Insurance companies can deny coverage as well.
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