Credit Counseling & A Debt Management Plan
A credit counseling service works with creditors to get you better terms on your loan, including reduced interest rates and lower monthly payments. You make one monthly payment to the counseling service, which distributes those funds to your creditors. Consolidating your debt payments with a debt management plan requires you to give up all but one of your credit cards, live on a budget and pay off your debt in 3-5 years.
Before you can enroll in a debt management program, you must qualify based on your income. If have enough money to handle your monthly expenses, you qualify. If your debts are too much for you pay down with your income, debt settlement or bankruptcy may be recommended by a credit counselor. If you do qualify based on your debt balances and income, your creditors still must accept proposals made by the credit counseling agency.
Pros of Credit Counseling:
There are plenty of nonprofit debt management companies eager to help consumers. The basic requirement is you must have enough income to cover your bills.
A debt management program works best with credit card debt consolidation because of the work they do to reduce the interest paid on your account. Credit counselors are trained to educate you about better ways to manage your money and the calls from debt collectors will stop.
Credit scores are not a factor in qualifying. There aren’t any minimum monthly payments. Each payment makes a dent in your debt, which is typically paid off in three to five years.
Cons of Credit Counseling:
If you miss a payment, the card companies can revoke any concessions they made in the original agreement and you’re back to square one.
You can’t sign up for any new credit cards. In fact, you are asked to stop using all credit cards. In many cases, this is actually a pro.
There is a fee for the program, so you must do the math and make sure it’s worth it. A comprehensive study by Ohio State University found that consumers in a credit-counseling program significantly reduced their debt and developed better money management skills than consumers who did not receive counseling.
The key is finding a good credit counseling service. For that, verify that the agency is accredited by the National Foundation for Credit Counseling.
When Credit Counseling Is the Best Option
Credit counseling is a good option when you admit you are ready to get help in managing your money. You need to be committed to stop using your credit cards, get serious about living on a budget, reap the benefits of reduced interest rates and get out of debt in 3-5 years.
Credit counseling is a good option when you want to consolidate your debt without taking out another loan and without major impact to your credit score. Additionally, with credit counseling, you won’t be putting any of your personal relationships at risk, as you might be when borrowing from family and/or friends.
For more information on credit counseling and to learn how others have paid off their debt, visit InCharge Reviews.
Borrowing from Friends and Family
One way to consolidate all your bills is to borrow money from a family member or a friend, pay off your individual debts and then pay off your family or friend over time. Whether or not this is a possibility for you depends on several factors, namely – are you close with someone who has the financial freedom to loan you money and be flexible with the repayment amount and terms? Do you feel comfortable asking your family or friends for money?
If you are considering asking a friend or family member for help with money, you should be willing to sit down with them, share your budget, debts, monthly payments and interest rates with them. Show them that you can afford to pay them back and how you plan to do that, including highlighting budget areas that you have already cut back or are willing to cut back.
Finally, don’t ask for help from a friend or family member who is struggling financially.
Consider the pros and cons of borrowing from friends and family.
Pros of Borrowing from Friends and Family:
- Easy: It’s often the easiest way to get money, since you don’t have go to a lender and fill out a lot of forms or be screened. If your friend or family member charges you interest, chances are it will be lower than whatever you can get from an established lending institution.
- Low to no Interest: Saving money is a key factor in debt consolidation. Your family and friends are most likely to loan you money with low to no interest.
- Flexible: A friend or family member might not even charge interest, and the payment schedule will be flexible. They won’t check your credit score, and that score will improve because credit bureaus will show you wiped out all those bills without acquiring any new debt.
- No origination fees: Most loans include origination fees and other costs. A loan from a family member or friend typically doesn’t. Depending on the size of the loan, this could be a large savings.
Cons of Borrowing from Friends and Family:
- If you have trouble repaying the loan, it could destroy a cherished relationship, damage the high opinion that family and friends have of you, trigger a terminal case of the guilts and make for some very strained Thanksgiving dinners.
- Another con is privacy. You may not want those close to you to know about your financial problems.
When Borrowing from Friends or Family Is the Best Option
Borrowing from family and friends to consolidate your debt is the best option when you know someone who has the resources to help you, is willing to help you, and does not need a swift repayment. You should consider this option when you have a good relationship with someone who wants to help you and forgive the occasional late or missed payment, due to unforeseen events. Additionally, this is a good option when the lender offers lower interest (or no interest) than you are currently paying and a repayment schedule that you can afford, even if it takes you several years.
Debt Consolidation with a Personal Loan
A personal loan is a loan issued by a bank or credit union, whereby you borrow a specific sum of money and pay it back in installments over a well-defined repayment term, usually 12-60 months. Personal loans typically have fixed interest rates that vary depending on your credit score and the size of the loan.
A personal loan is a form of unsecured debt, meaning the loan is not backed by any collateral. If you default on a personal loan, you won’t lose anything, unlike if you fail to make payments toward your car loan or mortgage, which are secured debts. However, if you do default on a personal loan and your creditor sues you, a lien could be placed on your wages or property.
When you consolidate debt with a personal loan, you borrow money from a bank, credit union or online lender, use that money to pay off one or more credit cards and then make one consistent monthly payment to the lender.
Pros of a Personal Loan:
There are a lot of potential lenders, so you can shop around and see which offers the best terms.
Stability comes with having one monthly payment due on a specific date. It’s a methodical and effective way to get out of debt, since you can’t just make minimum payments that don’t put a dent in the total amount owed. Most personal loans are made for three to five years.
Cons of a Personal Loan:
Unlike loans from family or friends, lending institutions thoroughly vet an applicant. The worse your credit score, the higher your interest rate will be. You might not even qualify for a loan if you have a poor credit score.
When a Personal Loan Is the Best Option
A personal loan is a good idea when the interest rate is lower than the average interest rate of your debts and the monthly payment is affordable. For example, if you owe $10,000 in credit card debt at 23.99% interest rate on a credit card, and you qualify for a personal loan at 10%, you will save $1,399 per year or more than $100 per month in interest by taking out a personal loan. If the payment with a personal loan is higher than you can afford, ask for a longer repayment period to bring it down.
Peer-to-Peer Loans (P2P)
Peer-to-peer lending matches borrowers who go online to fill out applications with investors, who lend money, hoping to get a solid return on their investment. Every year, peer-to-peer (P2P) lending gets more popular and is used for more purposes, including debt consolidation.
The attractive thing about P2P is you never have to leave home for any part of the process. There is no bank, credit union or lending institution to drive to and you won’t be talking to any managers about your loan. Sit down at your kitchen table with your personal computer and you’re ready to take on the whole process.
Peer-to-peer lending is an unsecured loan, meaning you don’t have to offer collateral to receive a loan. The lenders accept the risk that you will repay the loan, usually in a 3-5 year time span. Borrowers make monthly payments that get deducted from their personal bank accounts.
Pros of a Peer-to-Peer Loan
It’s easy to shop between lenders and compare rates and terms among peer-to-peer lenders. Sit down at your computer and with a few keystrokes, the information about Lending Club, Prosper, Upstart, StreetShares or any other P2P lender appears on your screen. The other big positive is that interest rates are far lower than the interest on credit cards. There is a lot of competition in this market and access to money is pretty cheap in the summer of 2020, so you should get some interest rates so low they’re hard to believe. Also, the fees associated with borrowing are usually much lower.
Cons of a Peer-to-Peer Loan
Each lender has its own platform to assess the reliability of a borrower and you can’t be sure what negative in your credit history could be the reason you’re accepted or rejected for a loan. Usually, there are minimum credit scores you must meet – 600 or better is the popular starting point – and even if you do qualify, it may not be for the amount you need to settle your debt.
When a Peer-to-Peer Loan Is the Best Option
If your credit report has a few dings in it and you can’t get a consolidation loan from a bank or credit union, P2P lending should be your next stop, maybe even your first stop. The P2P platform is a meeting place for investors willing to take a risk. They can overlook some of the dents in your credit history in hopes of getting a good return on their money. Their lending rates can help lower your monthly payments on credit card debt and get you out of debt faster.
Credit Card Debt Consolidation: Balance Transfer
Using credit card balance transfers to consolidate your credit card debt is another way to save money on credit card interest and make progress toward paying down your debt. Here’s how it works. Take higher interest credit card debt and transfer the balance to a credit card that has a lower interest rate, preferably one offering zero-percent interest. For example, if you have $5,000 in credit card debt on a card with a 23.99% interest rate and you can transfer this debt to a 0% card (12-month introductory offer), you’ll save $1,200 over 12 months. Most credit cards charge a 3% balance transfer fee. In this case, that’s only $150: still worth filling out the application.
If you are interested in pursuing balance transfer debt consolidation, go online and shop for “low interest credit cards” or “zero percent credit cards.” You don’t need to wait for an offer to show up in your mailbox. Be pro-active and see if you qualify for a credit card with better terms. Before transferring, give your current creditors a chance to lower or match competing offers.
Pros of a Balance Transfer:
It’s much easier to get a low-interest credit card than a personal loan. If you have a good credit score, credit card companies will inundate you with offers.
A 0% interest rate beats the heck out of the 14%-30% most credit cards charge, and it could save you quite a bit of money.
Cons of a Balance Transfer:
That low rate is always “introductory,’’ meaning it’s a time bomb that will usually go off in 12-18 months. At that point, the interest rate will jump back to the kind of number you ran from in the first place.
There are usually transfer fees when you put your old debt on a new card, so you must read the fine print and figure out how much you’re actually saving.
Credit card debt is a major factor in figuring a credit score. Unlike a personal loan, credit card consolidation does not wipe that particular debt off your ledger. You’re just moving it around, not eliminating it.
When a Balance Transfer Is the Best Option
Transferring high-interest credit card debt to lower-interest cards is a good idea when your credit score is good enough to qualify for low to no interest introductory offer cards. This method is also advantageous if you know that you can make major headway toward paying off your debt during the introductory, low-interest period. If you’re going to use the new card to run up more credit card debt, then don’t bother with this.
Taking out a 401(k) Loan
If you have a 401(k) plan at work, you can borrow a portion of it and use the money to pay off other debts. Loans against your retirement plan must comply with company rules, such as you can only borrow 50% of what you have vested or $50,000, whichever is less. Also, you have to repay it through a payroll deduction, within five years.
You may be required to pay back the borrowed sum with interest (around 5%). If you are interested in taking out a 401(k) loan, talk to your benefits administrator and compare payment terms with other consolidation options.
Pros of a 401(k) Loan:
It’s relatively easy to qualify to take out a 401(k) loan since there is no credit check. You’re borrowing from yourself, taking money you’ve put away for retirement.
Cons of a 401(k) Loan:
If you don’t repay the money from your nest egg, your golden years may consist of bagging groceries eight hours a day.
Pension plans are attractive because they put your money in an investment portfolio. When you take money out, it is no longer making you money. Defaulting on a 401(k) loan will also trigger taxes and penalties, since it would be considered income.
When Borrowing from a 401(k) Is the Best Option
Borrowing from a 401(k) is a good idea when you are young and still have decades to put away money for retirement. It’s also a good idea when you know you can afford the payroll deductions required to pay it back.
Taking out a Home Equity Loan
A home equity loan is a loan against the equity (current value – amount owed) in your home. For example, if the home you bought 10 years ago is worth $250,000 and you only owe $150,000, you have $100,000 in home equity that you could tap into to pay off your debts. Home equity loans are among the lowest interest (4%-7%) and longest repayment schedule loans (15-30 years) a person can access, making the monthly payments significantly lower and more affordable than other kinds of debt consolidation.
You can take out a home equity loan from a bank, credit union, mortgage broker or online lender like SOFI. The terms of the loan will depend on your credit score, how much equity you have in your home and your debt-to-income ratio. Home equity loans have fixed interest rates and fixed monthly payments.
Pros of a Home Equity Loan:
Low and stable interest rates, and the interest you pay is typically tax deductible. There is a set payment schedule that does not allow those token minimum payments. You can wipe all credit card debt off your credit score.
Cons of a Home Equity Loan:
You’re putting your house at risk. If you default on this one, you could lose the roof over your head.
When a Home Equity Loan Is the Best Option
A home equity loan is a good idea when your home has appreciated significantly since purchase and you have paid off more than 20% percent of the mortgage. It also helps if you have made a commitment to yourself to not run up additional debts after taking on the loan.
You should be very careful not to get into a cycle of borrowing against your home. As a one-time “get out of debt card,” a home equity loan can be the most affordable option. Remember, you want to be in a position that by your 60s and certainly by your 70s, your home is paid off.
Borrowing from a Life Insurance Policy
A lesser known option for consolidating your debt is to borrow money from a life insurance policy. You can borrow up to the cash value of the policy, use the money to pay off several smaller credit card debts, and then make payments to your life insurance policy. You may not need to repay the borrowed sum, but understand that your death benefit will be reduced by however much you borrowed.
Pros of Borrowing from Life Insurance:
If paying your debt off is more important to you and offers you more peace of mind than having a robust death benefit, borrowing from your life insurance policy may be a good idea.
Cons of Borrowing from Life Insurance:
Life insurance is designed to give you peace of mind and help your family manage the financial loss for your spouse, children or another family member. If the death of the insured family member would be catastrophic to the family’s finances, you should restrain yourself from borrowing against a life insurance policy. Consider the other options available to you on this page before going down this road.
When Borrowing from a Life Insurance Policy Is the Best Option
Borrowing from a life insurance policy could be a good idea if the policy has significant cash value, and if you or your family would not be financially devastated by the loss of the insured, with a reduced or no pay-out. This option may be preferable to bankruptcy, if none of the other options detailed are feasible.
Debt Consolidation through Payday Loans
A payday loan is a short-term, high-interest loan, often for a low dollar amount, usually about $500. Because annual interest rates for payday loans can be as high as 399%, there is no scenario where a payday loan would help you consolidate debt, save money or pay off your debt faster.
Cons of Payday Loans:
Payday loans have no advantages over other, lower interest, longer repayment term loans available. Payday loans are expensive and risky and will put you in a worse financial situation than simply defaulting on your credit card and other debt.
There are no situations under which we can recommend payday loans. If you can’t buy food, pay for utilities or rent, find a food bank, go to a church or other nonprofit organization and ask for help.
No-Credit-Check Installment Loans are similar to payday loans and come with extremely high interest rates as well (200%). Don’t consolidate other, lower interest rate debts with this kind of loan. You’ll find yourself in a deeper hole, buried by interest and likely unable to make your payments.
What Is the Best Way to Reduce Debt?
There are plenty of options for reducing debt, but the best place to start would be with a phone call to a nonprofit credit counseling agency like InCharge Debt Solutions.
The certified counselors at InCharge are trained to educate consumers on how to manage their money effectively and offer counsel on the best option for eliminating debt. The choices could be:
By law, the counselors at nonprofit agencies are required to offer advice that is in the client’s best interest. They could lose their nonprofit status if they don’t.
Call the credit counselors at InCharge Debt Solutions and then decide which option best suits your situation.
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- N.A. (2019, July 26) Debt Consolidation Loans. Retrieved from https://loans.usnews.com/debt-consolidation
- Sherrier, J. (2019, January 4) 9 things you should know about balance transfer cards. Retrieved from https://www.creditcards.com/credit-card-news/help/9-things-you-should-know-about-balance-transfers-6000.php
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