November 11, 2015
There is a lot of confusion out there about debt consolidation, so I’m going to break it down.
Sharon has a Target card ($3500 balance), a Walmart card ($900), a Home Depot card ($1000), Amex ($8300) and Discover ($2200). All together, she has $15,900 in credit card debt. The interest rates are between 8-24%. Each card has a different due date, and because there are so many of them she doesn’t always pay them on time, which results in late fees. Sharon wants to get out of debt, and she wants one easy monthly payment, but she has a low credit score. What are her options?
Traditional Debt Consolidation: Taking out one big loan
In this scenario, Sharon takes out one big loan to pay off all of her smaller debts. She makes one monthly payment to the big loan company and works toward becoming debt free. The only problem with this scenario is that Sharon will not be able to get a low interest rate on her big loan because she has a low credit score. This means that even though she has one consolidated monthly payment, it will be high, and it will take her up to 10 years to pay it off.
Debt Consolidation Pros
- One Monthly Payment
Debt Consolidation Cons
- Interest rate may be the same or higher as original loans
- It will take many years to get out of debt
- The total amount paid in interest and fees will be significantly more than the original balances
Consolidated Payments: Enrolling in a Debt Management Program after Credit Counseling
Sharon calls InCharge Debt Solutions for credit counseling. A debt management program is recommended. Sharon enrolls all of her cards onto the program. InCharge works with Sharon’s creditors to reduce the interest rates on her cards and waive late and over-the-limit fees. Once Sharon is enrolled in the program, she makes one monthly payment and pays her credit card debt off in 3-5 years.
Consolidated Payments Pros
- Credit score has no baring on eligibility
- Pay off your debt at lower interest rates
- Creditors may waive late fees and/or over the limit fees
- The total amount paid will be less than continuing to pay your cards on your own or consolidating with one big loan (above)
If you are interested in debt payment consolidation, start our self-paced online program.