Bill consolidation is one way to address numerous credit card debts and secured loans, such as for a car, by rolling them into a single debt. Consumers then make one monthly payment rather than several, ideally at a lower interest rate. When handled wisely, consolidating bills can reduce the amount of interest the consumer pays on debts. However, many consumers who look at consolidation as an option are already awash in debt; a spotty credit history may prevent them from acquiring an unsecured loan from a financial institution. The best way to consolidate bills for consumers who don't have the option of securing a low-interest loan is through a service provided by a consumer credit counseling organization: a debt management plan (DMP).
DMP Overview
A DMP is only one solution to reducing debt provided by a reputable credit counseling organization, notes the National Foundation for Credit Counseling. A DMP requires the consumer who agrees to this arrangement to make monthly deposits with the credit counseling organization, who acts as a trustee. The consumer's bills are then paid from the account. A DMP permits consumers the benefit of consolidating bills without having to take out an unsecured loan or use their homes as collateral by taking out a second mortgage or using their equity as a line of credit.
Comprehensive
A DMP applies a comprehensive solution to the consumer's bills. The NFCC notes that a good counselor will accept all of the bills the consumer needs to pay and not pick and choose from a few. According to Credit.com, when consumers agree to a DMP, the goal should be to pay off all outstanding bills in less than five years, after which he should be debt-free.
Salvages Credit History
The NFCC notes that seeking credit counseling won't affect credit history, as counseling in itself is not reportable to the three major credit bureaus, Experian, Equifax and TransUnion. In fact, the NFCC notes that consumers who successfully complete a DMP usually don't have problems getting new credit---but this requires the consumer to make monthly deposits in full and on time while the DMP is in place.
Reduced Payments
Credit counselors may negotiate with certain creditors on behalf of the consumer. For example, if credit card bills are particularly problematic, creditors may be amenable to lowering interest rates on the outstanding balance. They may also waive over-limit and late fees applied to the accounts.
Consumer Education
Part of agreeing to a DMP involves changing the consumer's spending patterns and educating her as to how to prevent bills from piling up in the future. The consumer is usually required to curtail the use of credit cards or otherwise incurring more debt. The goal of credit counseling, in tandem with one-on-one counseling of the consumer, is to provide her with the tools needed to prevent such a situation from occurring again.
Fees
The NFCC states that there are certain fees applied to credit counseling and a DMP. A one-time set-up fee of no more than $50 is required, but this is applied toward the consumer's bills, if the agency is reputable. Smaller fees, usually around $25 a month, are also required for these services. Selecting a legitimate nonprofit credit counseling agency to administer a DMP is necessary to avoid needless expenses to the consumer (see Resources).
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