Beginners Guide to Debt ConsolidationReviewAdvice

Beginners Guide to Debt Consolidation

Debt consolidation, also known as liability aggregation, helps you ease the financial pain and emotional toll that typically come with a high debt burden. Follow specific, baby steps to chart an effective course to consolidate your liabilities and gradually repair your credit.

A debt consolidation guide typically touches on total debt calculation, timing of consolidation, professional assistance during and after the consolidation process, and your responsibilities after consolidating debts.

Beginners Guide to Debt Consolidation

What Is Debt Consolidation?

Debt consolidation means a company, typically an intermediary, negotiates with your lenders to reduce your monthly interest and principal payments. This typically happens if you are saddled with debts and coping with economic tedium, not to mention intempestive and relentless calls from collection agencies – sometimes as early at 8:00 a.m. and sometimes past 9:00 p.m. The debt consolidation company talks to your creditors, shows them your paperwork, explains why you cannot pay and why it is in the lenders' interest to consolidate, and finally gets back to you with an answer. For example, say you owe a total of $32,000 on eight different credit cards. You lose your job or have to deal with with another type of financial tumult, and you therefore cannot make the total required payment of $3,000 to all eight card companies.

A debt consolidation business can help you reduce your total indebtedness, say, from $32,000 to $16,000, and make you deal with a single creditor to whom you would send your payment every month. This is very helpful if you were in our hypothetical situation because you not only cut your total debt by 50%, you also would have peace of mind knowing that you are dealing with one creditor and that you have to remember only one payment date.

How Do I Figure Out My Total Debts?

When finance people talk about "debt," "liability," "obligation" and "financial commitment," they refer to the same concept. One of my most distinguished finance professors in graduate school used to say that you are already in trouble, economically speaking, if you do not know how much you owe and need to figure it out through several calculations. The idea here is that you might be knee deep in debt if your total indebtedness eludes you. To figure out how much you owe in total, pore over your bank statements, going through each payment to determine whom it went to as well as what the remittance was for. That way, you know exactly how much you are spending each month on debt service.

Next, review a copy of your credit report by contacting each of the top three credit bureaus – Experian, Equifax and TransUnion. By law, you are entitled to a free credit report each year if you are a U.S. citizen or permanent resident. By delving into your credit file, you can spot anomalies, inaccuracies and fraudulent transactions. For example, if someone opened an account under your name and social security, you would be able to detect the scam by combing through your credit file.

When Should I Consolidate My Debts?

Believe it or not, you would know when it is time for you to consolidate debts, and this typically happens when you can no longer make minimum payments, make them on time or even pick up lenders' phone calls. If you start screening your caller ID incessantly to detect creditors' calls, then you know it might be time to assess your financial situation and determine whether debt consolidation might be a viable option.

You should consolidate your debts when your debt-to-income ratio rises precipitously, touching, for example, the alarming rate of 50% or 60%. Debt-to-income ratio equals your total monthly debt payments (money you sent to all institutions, from credit card institution to mortgage bank) divided by your net income, meaning your take-home pay. A ratio of 60% means that $6 of every $10 you earn goes to service your debt, an inconvenient scenario when compared with the recommended ratio of 30%.

What Are My Responsibilities After Consolidation?

If your application for debt consolidation is successful, make sure to keep your part of the bargain, which essentially is to make monthly payments on time, all the time. At the end of each month – or in the middle or on the 20th, it depends – you must send your check or electronic payment to the debt consolidation company, which, in turn, would transmit the funds to the single lender that has bought out all the other loans you consolidated. In some cases, you would send the check or online credit notice directly to the creditor, thus bypassing an intermediary. The creditor could initiate a legal action if you fail to pay on time or comply with the guidelines, terms and conditions you signed before embarking on the debt consolidation bandwagon.

Who Can Help Me?

Various organizations and professionals can help you on your way to debt consolidation. To successfully initiate and implement a liability consolidation process, follow a few of the recommendations below:

  • Contact your state's Department of Financial Services to learn about reputable debt consolidation companies in your residence area.
  • Reach out to the local Better Business Bureau branch for the same purpose.
  • Review the U.S. Government's comprehensive online resource on debt consolidation.
  • Ask your local BBB branch a list of nonprofits that engage in debt consolidation.
  • If your debt is substantial, hire a lawyer or financial planner to initiate the series of actions that ultimately could lead to debt consolidation.


Debt consolidation is not rocket science, but when faced with high indebtedness, you must take specific steps to ease your economic pain and eventually have peace of mind. These steps include figuring out your total debts, talking to the right people, determining when you should consolidate your debt, and knowing your responsibilities during and after the consolidation process.

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