Is A Debt Consolidation Program Right For You?
If you are juggling multiple credit card bills, you may benefit from the convenience of having one consolidated monthly payment. Consider all of the bills that the modern household pays (mortgage/rent, utilities, cell phone, cable, internet, etc.). Adding 5-10 monthly credit card bills can overwhelm your bill-pay. Multiple payments are due every week. Going on vacation or having a hectic few days can result in several late payments and hundreds of dollars in fees. Nonprofit credit consolidation companies provide you with the convenience of making one monthly payment to help you become debt free.
How do Credit Consolidation Companies Work?
Consolidated credit companies are another name for credit counseling agencies. They advise consumers on budgeting and discuss options available for eliminating debt.
Consolidated credit companies, like credit counseling agencies, usually point consumers at debt-relief options like a debt management program, debt settlement, a debt consolidation loan and, in extreme situations, bankruptcy.
Features of the Best Debt Consolidation Companies
- A nonprofit organization
- Low fees
- Lower interest rates than you are paying now
- Affordable monthly payments
- A program that pays off your debt in no more than 5 years.
How to Consolidate Credit Cards with a Nonprofit Company
Consolidating your credit card debt with a nonprofit debt consolidation company is not as hard as you may think it is. Here are 5 simple steps to credit consolidation with a nonprofit:
- Call a nonprofit debt counselor. Or choose online debt consolidation. Credit counselors can help with debt consolidation, free of charge.
- Authorize the nonprofit counseling agency to access a list of your credit card debts and monthly payment information from your credit report.
- Complete a budget, detailing your monthly income and expenses.
- Determine how much money you have each month to pay toward credit card consolidation.
- Choose a consolidation solution. There are many ways to consolidate your debt including a debt consolidation loan, bill consolidation through a nonprofit debt management program, a home equity loan, or doing balance transfers from higher interest rate credit cards to a card with promotional rates.
Credit Consolidation through a Consolidation Loan
With credit consolidation, you take out a new loan and use it to pay off smaller loans. Because you now only have one loan, you have one monthly payment. However, taking out a big loan can be tricky. If your credit score is not high, you may not qualify for a consolidation loan. If you do qualify, you may not qualify for competitive interest rates. Additionally, whenever you take out a new loan, there are loan origination fees which can run into the thousands. Finally, if you are able to secure a debt consolidation loan with a low monthly payment, it may be at the expense of the repayment period: you may be paying the loan for a decade or longer.
Features of Credit Consolidation
- The lower your credit score, the higher your interest rates will likely be.
- Origination fees range from 1 to 6 percent, though some lenders do not charge fees, such as Discover, Lightstream and Sofi.
- Most consolidation lenders do not allow co-signers, but some do. For example, FreedomPlus.
But there’s good news. You have a choice when it comes to credit consolidation.
Nonprofit Debt Management Program
Taking out a loan to pay off debt is counter-intuitive, right? Especially when taking on a new loan requires hefty fees, rolled into your total balance, or a long repayment period. The InCharge Debt Consolidation Alternative, or debt management plan, is a program that gives you all of the benefits of debt consolidation without having to take out a new loan. With the debt management program, all of your payments are consolidated into one monthly payment that you pay to InCharge. InCharge then pays each of your creditors. InCharge helps you secure lower interest rates on many of the credit cards you do have (with exceptions), meaning that more of your monthly payment will go to pay off the balance, and less to interest. This will help you pay off your debt faster. The InCharge debt management plan is designed to help you get out of debt in 3-5 years, paying less than you would if you continued on your own, or even with traditional debt consolidation with higher interest rates.
Is bill consolidation through a debt management program free? No. All debt consolidation help comes at a price. When you work with a bank or other for-profit debt consolidation firm, you will pay fees in the form of interest and loan origination charges to secure and maintain a debt consolidation loan. If you work with a nonprofit organization, like InCharge Debt Solutions, you will pay a set-up fee (on average, $40) and a monthly fee to maintain it (average $25). It’s important when you consider debt relief solutions that you compare interest rates and fees. Before pursuing any credit card consolidation program, ask your the following questions:
- What is the monthly payment?
- How much of my payment is applied to the principle and how much to interest?
- What is the payment schedule? How long until I am debt free?
- What are the origination charges or set-up fees?
- Can I afford the monthly payment? The best debt consolidation companies will have a monthly payment that you can afford.
- What happens if I pay late?
If you are considering working with a credit consolidation company, you also want to make sure that you are working with a reputable company. Check out their Better Business Bureau (BBB) profile. Are they accredited? InCharge is proud to maintain an A+ rating from the BBB and accreditation from the Council on Accreditation.
Unlike traditional debt consolidation loans, a nonprofit debt management program can help you lower your interest rates and consolidate your credit card payments, even if you have bad credit. That is because a debt management program isn’t extending new credit or a loan to you. They are simply helping you bundle your payments and make them on-time, and helping you lower your interest rates, despite a poor credit history. Why? Creditors may see you as a bankruptcy risk. By giving helping make your payment more affordable with lower rates, and supporting nonprofit debt consolidation programs, the creditors are attempting to prevent you from defaulting on your debt.
How Do I Get Started With a Debt Consolidation Program?
Start online credit counseling to see if you qualify for our debt consolidation alternative. During your free counseling session, we’ll help you identify the root cause of your financial problems. We’ll also help you develop a budget that minimizes your monthly expenses. Finally, based on your income, assets and budgets, we’ll recommend a debt relief solution tailored to your personal situation. This solution may be the debt management plan which consolidates your monthly payments. Other solutions include bankruptcy and referrals to other nonprofit organizations who can help you save money and eliminate debt. If you’d prefer to speak with a live counselor, call the number on the right.
How To Use The Debt Snowball To Pay Off Debt
The debt snowball method was made famous by Dave Ramsey. First, you accumulate $1,000 for an emergency fund. Then list all your debts (except your mortgage) and start paying them off smallest to largest regardless of interest rates.
Ramsey says paying off one debt builds momentum to pay off the next. Success builds on success. The theory has proven effective, though it requires discipline and sacrifice, two things that consumers were probably missing in the first place. To summarize:
- Time to Pay off Debt: Depends on total amount and your motivation.
- Amount of Principle Reduced: Whatever amount is owed.
- Average Fees/Interest: None.
- BBB Rating: Not rated.
What Does a Debt Consolidation Company Do?
Traditional debt consolidation companies review your debts, income and credit score. If you qualify for a debt consolidation loan, they will discuss terms with you which will include the repayment period, the interest rate and the monthly payment. After you are issued a check, you will pay off all of your individual credit cards and owe one monthly payment to the credit consolidation company. One of the downsides of working with a traditional debt consolidator is that your credit card accounts are open and available for use. You may be tempted to continue using your cards and could wind up doubling your debt. Consider the following tips if you decide to work with a traditional debt consolidation company and take out a brand new loan:
- Negotiate the lowest possible interest rate for your loan. Make sure your monthly payment is less than the combined minimum payments on your credit cards.
- What is the term? How long will it take you to pay off your credit card debt. The best debt consolidation programs will help you get out of debt in 5 years or less.
- Is the interest rate fixed or will it go up during the term. If it goes up, can you afford the change in monthly payment?
- Once your credit cards are paid off, consider putting your credit cards away. Make a budget and stick to it.
Debt Settlement Example: National Debt Relief
You stop paying your bills and start funding an escrow account. The company negotiates with your creditors for a reduced lump-sum payment.
If an agreement is reached, you release the funds to pay the discounted debt. If there’s not enough money in escrow, the company offers you a monthly payment program. This method is formally known as Debt Settlement and recommended only for those in severe financial stress.
The advantage is you can cut more than 50% off your debt. The disadvantages are fees and interest accumulate during negotiations, your credit score will tank completely and debt collectors will call every night until the matter is settled.
- Time to Pay off Debt: 24-48 months.
- Amount of Principle Reduced, if any: 50% before fees.
- Final Rule for Debt Settlement: company must achieve savings for you before they can charge you
- Your creditors can sue you while you’re not paying your debt. If they win, your creditors can garnish your wages.
- Average Fees/Interest Rate: 20%-25% of the original debt, depending on which state you live in.
Note that drastically reducing your credit score could impact your career, especially if you maintain a security clearance. Bad credit is the leading cause of loss of security clearance. A low credit score can also impact employability in the financial services sector. If you want to maintain a good credit score, debt settlement may not be the best way to consolidate debt.
Debt Settlement with an Attorney Example: Oak View Law Group
This is a one-time debt settlement method with the same pros and cons, but an attorney negotiates with your creditors instead of a settlement company or doing it on your own.
The client stops paying creditors and puts money into a trust, which must have 30% of the amount owed before Oak View makes a settlement offer.
- Time to Pay off Debt: 21 months on average.
- Amount of Principle Reduced, if any: 53% of original debt.
- Average Fees/Interest Rates: 15% of original debt for cases over $10,000; 15% of amount saved for debts under $10,000. For instance, if your debt is reduced from $8,000 to $5,000, you would pay 15% of $3,000. There is also a monthly $50 consultancy fee.
- BBB Rating: A-
Debt Consolidation with a Peer-to-Peer Lender Example: Lending Club
This is an online lending institution. Borrowers apply for loans, then individuals or institutions invest their money to provide those loans and earn monthly returns. It’s like a traditional bank loan, though peer-to-peer sites say they are less complex and can offer better terms.
- Time to Pay off Debt: 24-60 months.
- Amount of Principle Reduced: Borrowers can apply for loans from $1,000 to $40,000.
- Average Fee/Interest Rate: Borrowers fall into one of seven categories that have interest rates ranging from 5.32% to 35.27%. There is also a 1% to 6% origination fee.
- BBB Rating: A+
Nonprofit Debt Consolidation Example: InCharge Debt Solutions
A credit counselor reviews your financial situation, comes up with a budget and provides educational resources to help you properly manage your money. If he or she recommends you spend $276,000 on a dinosaur skull, you might want to ask for another counselor.
If you qualify for a debt management program, the company works with creditors to lower interest rates and waive penalties. You make one monthly payment to the company, which distributes the funds to your creditors. Unlike debt settlement, your accounts are eventually paid so your credit score doesn’t get destroyed.
- Time to Pay off Debt: 48-60 months.
- Amount of Principle Reduced: None
- Average Fee: 0-$75 set-up fee; monthly fee not to exceed $50
- Interest Rate Reductions: Varies
- BBB Rating: A+
Those are the primary methods to deal with debt. The question is not whether they work. The question is whether you are willing to work hard enough to make them work.
If you do, you might be on your way to buying a Bahamian island. With any luck, you’ll find a dinosaur skull buried in the sand for free.
What about Medical Debt Consolidation?
If you have medical debt, you may be wondering what options are available to you. Medical debt can be consolidated into a nonprofit debt management program, though you may not receive lower interest rates. Considering that much medical debt is already at a low or zero interest rate, this should not be a deterrent. By consolidating medical debt to a debt management program, you are simplifying your bill pay and committing to timely, consistent payments of your medical debt. This will help you pay off your debt faster and also may have a positive impact on your credit score.
If you are facing high medical bills with decreased income and depleted assets, you may qualify for medicaid.
Use A Debt Consolidation Calculator
You can compare your debt consolidation program options by using a debt consolidation calculator. The calculator will help you determine how much you can save by comparing your current interest rates with the proposed debt consolidation program’s interest rate. It will also help you determine your monthly payment based on your total debt balance, interest rate and repayment term.
10 Things You Should Know About Credit Card Consolidation Companies
Before moving ahead with a credit card consolidation solution, consider the following:
- Don’t proceed if you can’t get your interest rates reduced, especially if you need monthly payment relief. The only way to get payment relief is to get interest rate concessions.
- If you only have one or two credit cards, it may be easier to call your creditors and try to negotiate better interest rates on your own than to pay third party fees for the service. The more cards you have, the harder it can be to manage payments and negotiations on your own.
- Get the advice of a nonprofit credit counselor before consolidating your credit card debt. Credit counseling offers free debt help and the expert advice could save you time and money. You may find out that your debts are indeed overwhelming and bankruptcy is best your option, or that your debts are judgment proof and thus you have nothing to lose by defaulting.
- Don’t sign an agreement until you’ve completed a thorough budget and are confident that you can comfortably afford the monthly payments.
- Agree to stop using credit cards while you pay down your debts. Switch to debit or a “cash in the envelop” system. Consolidating your debts, and then running up more debt will put you on the fast track to bankruptcy.
- Get at least 3 estimates from credit card consolidation companies before choosing one.
- Read online reviews and the Better Business Bureau complaint history and profile, before consolidating your credit card debt with an agency. Not all companies adhere to the same standards.
- Understand that most credit consolidation companies cannot help you with your car loan, medical debts, or mortgage payments.
- Make sure you understand the fee structure of the debt relief company you plan to work with. Know that under the Telemarketing Sales Rule, debt relief companies cannot collect upfront fees, before they’ve done work on your behalf.
- If you’re concerned about your credit score, ask the credit card consolidation company if working with them will impact your credit score.
- (Bernstein, J.)(2011, Sept. 3). Nicolas Cage, Compulsive Spender. Retrieved from http://www.thedailybeast.com/articles/2009/11/03/nicolas-cage-compulsive-spender.html
- (Rudegeair, P.)(2016, April 20). LendingClub Boosts Projected Loan Losses, Raises Rates on Some Loans. Retrieved from http://www.wsj.com/articles/lendingclub-boosts-projected-loan-losses-raises-rates-on-some-loans-1461196184
- (NA)(ND). Debt Settlement and Debt Consolidtion Fees. Retrieved from https://www.ovlg.com/services/fees.html#settlement