What is debt consolidation?
Debt consolidation is any type of plan that allows you to roll several debts together and pay them off as one debt. 

Does debt consolidation reduce my debt?
No, it just re-packages your debt. However, in some cases, you may end up paying less per month because you can consolidate at a lower interest rate. (That is the sum of your old monthly payments can be less than the sum of your new debt consolidation payment.) At any rate, it simplifies things because you now only have one payment instead of several. 

Will debt consolidation hurt my credit report?
If done correctly, debt consolidation will not only not hurt your credit report, it could help it. However, your credit report is complex and looks at many things. Many people have hurt their credit score before they reach debt consolidation. 

How can debt consolidation improve my credit?
Debt consolidation re-packages many debts into one debt. It usually involves paying off the debts with one giant loan, and then paying off the loan. Paying off your debts could help your credit. Having only one payment instead of several decreases the chances you’ll miss a payment or be late, so it can help, there, too. Plus, debt consolidation is a recognized, reputable approach to debt management, so if creditors find out you’ve consolidated debt, that do not necessarily think less of you as a potential borrower. 

How does debt consolidation work?
The first step is to contact a certified credit counselor to work with you. If debt consolidation is the right approach for your situation, there are three main types of debt consolidation. They are mortgage refinancing, a home equity loan, and then a regular loan, either secured or unsecured. 

Do I have to own my own home to do debt consolidation?
No, but two types of debt consolidation are based on home ownership. They are refinancing your present mortgage or taking out a home equity loan. If you own a house, these may be the better ways to consolidate your debt. 

How does refinancing work?
If you have an existing mortgage, you can work with your lender or another mortgage company to re-do your mortgage. In simplistic terms, you are going to take out a new mortgage on your present home. This mortgage will be used to pay off your old mortgage (whatever is left on it) plus your debts. You still own your home, you are left with some cash (to pay your debts), but you have a different mortgage. Since you can structure the mortgage as a 30-year mortgage, you may not see a big difference in your monthly payments. In fact, your new mortgage could be less than your old mortgage plus your monthly payments on the individual debts. 

Wow, that sounds foolproof. What could go wrong?
You cannot refinance without owning a house (that rules some people out right there), and you will find that refinancing is a rather involved process that may require some fees along the way. It can take a couple of months to get the paperwork squared away, and in the interim, you still have to make all of your regular payments. So there are some hurdles before you start. Then, once you refinance, you have to change your financial habits and how you manage money. The biggest danger to a refinancing arrangement is that you fall back in debt.

How would that happen?
Your refinancing will let you pay off all of the debts you consolidated. Suddenly, you have a bunch of empty credit cards. You may find the arrangement leaves you with a little more disposable income every month. If you’re not disciplined, it’s easy to start charging things again. It’s very tempting to take a little extra cash and blow it on something … and get other loans. That’s why you need to be working with a certified credit counselor.

What exactly is a certified credit counselor?
These are specially trained professionals who work with people in debt. Actually, anyone can call himself a credit counselor or a financial advisor or something like that, so you have to be careful. There is a federal organization (National Foundation for Credit Counselors, nfcc.org) that provides oversight and sets requirements for credit counselors. Professionals who meet these requirements are known as certified credit counselors.

Where do I find a certified credit counselor?
Go online to nfcc.org. The website is easy to navigate, and there’s a place where you can enter your zip code to see who is available in your area. You can also see our article on certified credit counselors and access a government website as well. It's not hard to find one once you know where to look. 

What do I do when I visit my certified credit counselor?
You’ll make an appointment. The counselor may tell you what to bring, but generally figure that you need to bring all of your financial information. Make a list of your various debts, bring along a pay stub or other information on your income and bank accounts, and bring a notepad so you can write down what you talk about. 

What does a certified credit counselor actually do for me?
There are lots of factors that affect your financial health. Your counselor’s job is to get to know your particular situation and then recommend the best options for you. Counselors know about a lot of financial programs and plans that you probably have never heard of. They can also assess your situation objectively. There is no one-size-fits-all-solution when it comes to debt problems. Your counselor is going to help guide you to what is going to work best for you. 

How does the certified credit counselor get paid?
Discuss any fees with the counselor before your first appointment. If you cannot afford a counselor, mention that when you call. There are sometimes free services available. Your counselor may be able to save you thousands over the long haul, so even if a fee is involved, it could be money well spent. Fees should not be very high. You can even make a few phone calls and comparison shop before you go.

Let’s come back to debt consolidation options. What is a home equity loan?
It is a loan offered by a financial institution that is based on the equity in your house. Obviously, you have to own a house to qualify. 

What is home equity?
Home equity is the amount of “profit” you have in your home if you were to sell it today. For instance, let’s say you have a mortgage for $200,000 on a house that, conservatively estimated, would bring $250,000 on the market today. Your home equity is $50,000.

How does a homeowner get home equity?
Home equity increases in two main ways, either you pay down the mortgage or your home value increases. If you have owned your home for a long time, you generally have built up some substantial equity because you’ve been paying off the mortgage plus your home has likely increased in value. 

How does the home equity loan work?
It’s a loan you can use to pay off your individual debts. You then just pay off the home equity loan. The loan is based on the equity in your home.

What is the advantage of a home equity loan?
It depends on how you structure or arrange the home equity loan. You may find that you can get a lower interest rate than you’re currently paying on your individual debts, so your home equity payment is less than the sum of the payments on your smaller loans. It simplifies things by giving you one bill. You can arrange to pay it over a long period of time, which can help ease the burden, too. 

So what can go wrong?
Read the fine print. Both mortgage refinancing and a home equity loan use your home as collateral, so find out what the lender can do if you don’t repay promptly. You need to know those terms. And, like a refinancing loan, you run the risk of going back into debt if you’re not careful. 

How can I avoid future debt?
A certified credit counselor can help you learn basic financial planning. He or she will probably teach you how to set up a budget, how to stick to your budget, and some financial strategies to better manage your money. At the end of the day, it is up to you to make the right decisions. 

What if I didn’t get into debt because I was careless? Do I need to bother with this counseling stuff?
Many people get into debt because of medical bills or other emergencies. Some people get into debt because they don’t know how to manage their money. Either way, you need a certified credit counselor to help you figure out the best way out of debt. There are lots of financial programs and strategies that the average person simply would not know about. That’s the main role of the counselor. A counselor will get to know you and your circumstances. 

Are there any other types of debt consolidation?
There are also regular loans. In simplistic terms, you’re taking out a new big loan to pay off a bunch of little loans. Loans can either be secured or unsecured. 

What’s a secured loan and how is it different from an unsecured loan?
A secured loan is made based on something of value that the lender holds as “collateral.” This means that the lender has rights to the collateral if you don’t pay back the loan according to its terms. An unsecured loan is made without any collateral. 

What’s an example of a secured loan?
Most car loans are secured in that the car finance company can repossess your car if you don’t pay them. That’s because the car itself is collateral in such loans. 

Is it easy to get a secured loan?
A secured loan requires that you have suitable collateral. If you do, it may be relatively easy to get in that the lender is not taking a great deal of risk. 

What about a line of credit?
Sometimes the loan you get to consolidate your debt comes in the form of a line of credit. You use your credit to pay off small debts, then you pay back the credit line. With a line of credit, you usually get a checkbook so you can write your checks against the line of credit. 

What about companies that say they can negotiate with my creditors and reduce my debt?
That process is called debt negotiation. In most cases, a company or organization handles your case and works with your creditors to reach a settlement. Your creditors may agree to settle the debt for less than you actually owe or to offer you more favorable terms. 

How can I enter into debt negotiation?
Be very careful about this approach, since it definitely will impact your credit score. When you negotiate a debt (even if a company is doing it for you), you are essentially telling the company you won’t or can’t pay them back according to the terms of the loan. You are more or less announcing you are on the brink of bankruptcy. You are making an effort and paying something (which is why many creditors go along with this plan) but you are also defaulting. Creditors will report this to the credit bureau; you are also unlikely to get credit back with them soon.

How can I find a debt negotiation company?
You should only work with a certified credit counselor if you go this route, because there are many debt negotiation companies that are not exactly reputable. Don't work with any debt negotiation outfit or debt relief company that approaches you. You should find them. Companies that seek you out may not be reputable organizations. 

How could a debt negotiation company scam me?
A pretty basic scam is that the debt negotiation company tells you they’ll take care of your debts and all you have to do is pay them a certain amount of money each month. They may even warn you not to contact your creditors. Then, several months down the road, you find out they haven’t paid or even talked to your creditors. There are also more sophisticated scams. 

What about companies that promise debt relief?
Debt relief is a pretty vague term and it's used by different people in different ways. Talk to your certified credit counselor. Your counselor can help you figure out who’s who and what companies you can trust. 

Wouldn’t I be better off just going bankrupt?
Bankruptcy is the most extreme step and really should not be even considered until all other avenues have been exhausted.

Isn’t bankruptcy the best solution for some people?Bankruptcy is never your best choice. For a very few people, it can be the only option, but it’s never a “best” anything.

What’s so bad about bankruptcy?
Bankruptcy removes a lot of control of your money and assets away from you. For instance, you may be forced to sell certain things to pay your debts. Bankruptcy is very bad news on your credit report and it stays there for a decade. Even if you can get back on your feet financially, it will be hard to re-establish credit for a long time. This means you should get used to paying cash for everything. Eventually, you may be able to get a car loan or a mortgage, but you’ll pay higher interest rates because you’re considered a high-risk borrower. Since some employers check credit histories before hiring, bankruptcy can even affect your chances of getting a new job!

Don’t different states have different laws about bankruptcy?
Yes, states have individual laws governing bankruptcy and credit, plus there are all federal regulations. That’s why you need a local certified credit counselor. 

This sounds overwhelming. Where do I begin?
You begin by getting some information. That's why you should spend some quality time on this site. But don't just stop here. There are lots of great sources of financial information online, and they're free. Take some time to learn what you need to know. Then make an appointment with a certified credit counselor. You'll need to get your financial information organized, and you'll probably want to learn about budgeting and money management (even if you didn't get in debt because of carelessness, because most of us could manage our money better than we do). Take it one step at a time. You probably did not get into financial trouble overnight, and you won’t get out of debt overnight, either. The good news is that there are lots of programs out there that really can help you. People have gotten out of huge amounts of debt. It takes patience, determination, and a little bit of knowledge. But it can be done!