What to Look for in a Debt Consolidation Program
There are many avenues to eliminating debt through debt consolidation, but there are just as many detours that will compound your problem if you are not paying attention.
Keep your guard up against credit repair scams that promise results that don’t seem possible. There are plenty of advertisements in this industry that sound too good to be true … and it’s because they are! Don’t fall for them.
The first thing to look at before joining a debt consolidation program is confidence that the agency, bank, credit union or online lender is there to help you, not to make money off you.
You should be asking how long they have been in this business; what their track record for success is; what do the online reviews say about customer experience; and how much are you really going to save by using their service?
The last question is the most important because you can do any of these debt consolidation programs yourself. So, if the fees charged make it a break-even exchange, there really is no reason to sign up. Your total cost in a program should save you money while eliminating your debt.
How do Credit Consolidation Companies Work?
Credit consolidation companies work by finding an affordable way for consumers to pay off credit card debt and still have enough money to meet the cost of basic necessities like housing, food, clothing and transportation.
The term “credit consolidation companies” covers a lot of ground in the debt-relief industry. They range from giant national banks to tiny nonprofit counseling agencies, with several stops in between and offer many forms of credit card debt relief.
To simplify things, it is easiest to divide credit consolidation companies into two categories:
- Those who consolidate debt with a loan based on your credit score
- Those who consolidate debt without a loan and don’t use a credit score at all
Banks, credit unions, online lenders and credit card companies fall into the first group. They offer debt consolidation loans or personal loans you repay in monthly installments over a 3-5 year time frame.
They start by reviewing your income, expenses and credit score to determine how creditworthy you are. Your credit score is the key number in that equation. The higher, the better. Anything above 700 and you should get an affordable interest rate on your loan. Anything below that and you will pay a much higher interest rate or possibly not qualify for a loan at all if your score has dipped below 620.
The second category – companies who provide credit card consolidation without a loan – belongs to nonprofit credit counseling agencies like InCharge Debt Solutions. InCharge credit counselors look at your income and expenses, but do not take the credit score into account, when assessing your options.
Based on the information provided, they recommend debt relief options such as a debt management program, debt consolidation loan, debt settlement or filing for bankruptcy as possible solutions.
If the consumer chooses a debt management program, InCharge counselors work with credit card companies to reduce the interest rate on the debt and lower the monthly payments to an affordable level. Debt management programs can eliminate debt in three years, but also can take as many as five years to complete.
If the debt has spiraled out of control, counselors could point you toward a debt settlement company or a bankruptcy lawyer.
Debt settlement companies make enticing claims on tv and radio advertisements – “We’ll settle your debt for half of what you owe!” – but those claims are extremely misleading. Creditors do not have to accept settlement offers and some won’t. The actual amount debt forgiven often is far less than promised.
Bankruptcy is the “nuclear option” when all other possibilities have been exhausted. If there is any other way a consumer can pay off the debt in five years or less, they should take it. If not, bankruptcy is a viable option.
Bankruptcy filings are extremely successful – 95% of Chapter 7 filings had their debts discharged in 2017 – and consumers get a chance to start all over with their finances. However, the bankruptcy filing is on your credit report for 7-10 years and you may find it very difficult to qualify for any kind of credit during that time.