Debt is a constant component of the modern American economy. Both individuals and businesses have to incur debt in order to maintain their lifestyles or continue operations. For most people, accruing debt is a cyclical process that involves incurring debt in times of need and paying it off in times of sufficient capital.
Unfortunately, there are businesses whose sole means of income involves taking advantage of those who have overextended themselves on credit. The companies advertising on the radio offering you debt consolidation or debt settlement services could cause far more problems for you than solutions.
Consolidation just means taking out another loan
Debt consolidation sounds appealing, especially when described by someone who has a profit motive. Getting rid of multiple bills and only needing to pay one account every month, potentially at a fixed or even lower interest rate than what you currently have, can sound like a way to save money.
However, just because you transfer the balance of your credit cards over to a consolidation loan doesn’t mean you can’t continue to accrue more credit card debt. All too often, individuals who take out debt consolidation loans wind up deeper in debt because of those loans, as they may have to continue spending on credit for their basic necessities, thereby rapidly getting back to the same balance on their credit card.
Debt settlement hurts your credit and often involves a loan
Debt settlement services also sound quite appealing when described in commercials. Who wouldn’t like to reduce their credit card debt and pay off only a fraction of what they owe? In reality, debt settlement is not that simple.
You will need to have money available for a lump sum payment to your creditors. That probably means the company helping with your debt consolidation will want to finance the process as well. That could mean accumulating more debt than you are capable of paying off. Beyond that, when you settle your debt, your creditors will likely report your settlements to the credit monitoring bureaus, reducing your credit score.
Unlike bankruptcy, which eventually results in the discharge of your debts, these so-called debt solutions often don’t get rid of the underlying debt and leave people vulnerable to even more precarious financial situations. Although bankruptcy can have a negative impact on your credit in the short-term, it can be an opportunity for you to improve your credit in the long run.