Contrary to what many might believe, entering a debt consolidation program may actually have a positive effect on a person's credit record. While there is no guarantee that simply paying the bills through a consolidation service will instantly qualify a person for a new car loan or home mortgage, it can be a step in the right direction. Most companies that are available to provide these services deal with unsecured consolidation credit cards, medical bills and other debt for which no collateral has been pledged.
With secured credit, the creditors have the option of claiming ownership of the property pledged against the loan, regardless of the type of personal property, and in most cases the debtor has as much interest in losing the property as the creditor has in owning it. Very few creditors will lend money to a person hoping they default on the loan so that they can claim the property for their own. Most would prefer to work with a debtor to insure they can make their payments in full and on time.
However, most credit counseling services work with debtors in over their head with unsecured credit, and because they are probably behind on one or more payments will not qualify for even a high-risk loan. Services can help them contact their creditors and arrange to eliminate a large portion of the debt that was caused by late payment fees and over the limit fees and they may even be able to reduce the interest charges. When dealing with loans that are unsecured, consolidation credit companies can also usually get the payment scheduled reset to zero, meaning the account will no longer be showing as late.
Even if payments are still technically behind the original payment schedule, resetting the date to zero allows a person to begin rebuilding their credit rating and when payment are made on time and in the amount at which was agreed, the creditor will report to the credit bureaus that payments are made on time. It can take a few months of regular payments for this positive activity to have a beneficial effect on the credit rating, but it does take longer to rebuild the report than it took to decimate the credit history.
Consolidation of unsecured credit can also help the debtor stay out of financial trouble as well as provide peace of mind, knowing the bills are going to be paid on time and that the phone calls demanding money will come to an end. The majority of creditors, once they enter into an agreement to accept a payment schedule will discontinue calling the debtor and as long as the payments are made on time, everyone is happy.
Creditors holding unsecured debt usually have only one option to collect on defaulted accounts and that is through legal action. Many simply write off the debt, depending on the amount, as it is cheaper than going through the court system with smaller loan amounts, typical for credit cards. However, through unsecured consolidation, credit holders have a better chance of collecting their money that selling the debt to third-party collection agencies.
