There are basically two options when you are asking, how does debt consolidation work. If you have debt and you want to consolidate it, your options are a debt consolidation loan and using a credit counseling service. The big difference in the two alternatives is one of them is a loan and the other is not.
How does debt consolidation work with a loan? Most debt consolidation loans are secured and your home is normally the collateral. While this is an alternative for getting out of debt, I do not consider it a good one. What happens is you will be paying off your debts with the equity in your home. You will ultimately be paying your debts in the form of a house payment. Your payments may be lower, because you are paying them off over a longer period of time. Your interest rate will be lower and the interest you pay will be tax deductible. The downside—if you default on the loan, the lender can foreclose on your home. According to financial experts, many people that take out debt consolidation loans will have credit card debt again within a year.
How does debt consolidation work with a credit counseling service? Your interest rates will be lowered as well as your fees being eliminated through the actions of the credit counseling serivice. You will make one payment each month to the debt counseling service and they will disburse it to your lenders. Your debt will decrease, your credit card accounts will be closed and your collection calls will stop. You do not have to enroll all your credit card accounts. This is a credit score friendly version of debt relief. The program normally takes about 5 years to complete. Credit counseling is a good alternative as long as it used early enough.
These are the two most popular options for debt consolidation. Take some time to think about your financial situation and what will work best for you before making a credit card debt relief choice.