Debt Consolidation Programs

Nonprofit Debt Consolidation

Nonprofit consolidation is a payment program that combines all credit card debt into one monthly bill at a reduced interest rate and payment. These programs are offered by nonprofit credit counseling agencies, who work with credit card companies to arrive at a lower, more affordable monthly payment for you. Nonprofit debt consolidation is the truest form of a debt consolidation program. It’s more of a service than what you get with a loan, and a purer form of consolidation than debt settlement. You have the backing of a nonprofit company with credit counselors to answer questions and guide you through difficult financial situations.

Pros of Nonprofit Debt Consolidation:

• This is not a loan and your credit score is not a factor in qualifying.
• Reduced interest rates (somewhere around 8%, sometimes less) help lower monthly payments.
• Credit counselors assist in developing an affordable monthly budget.
• Financial education offered to keep this from happening again.

Cons of Nonprofit Debt Consolidation:

• If you miss a monthly payment, all concessions granted by the creditor could be canceled.
• There is a one-time setup fee between $50-$75 as well as a monthly service fee averaging $32, but the savings on interest should more than make up for the fees.
• You are required to stop using credit cards except for one emergency card.

Sign-Up Process:

1. The easiest way to enroll is through online debt consolidation or you call a counselor at a nonprofit credit counseling agency like InCharge Debt Solutions.
2. Authorize the agency to access a list of your credit card debts and monthly payment information from your credit report.
3. Gather information about your monthly income and expenses to determine how much money you have available for credit card consolidation.
4. Be prepared to answer questions about your goals and the timeline you’re working toward to become debt free.
5. Credit counselors will assess your situation and tell you if you qualify for a nonprofit debt consolidation program. If not, the counselor may recommend a loan, debt settlement or possibly bankruptcy as a solution.

Debt Consolidation Loan

The traditional form of credit consolidation is to take out one large loan and use it to pay off several credit card debts. Because you now only have one loan, a debt consolidation loan, you have one monthly payment, which simplifies the bill-paying process. However, this can be tricky. Lenders rely heavily on your credit score as a signal that you will repay the loan. If you are having problems paying credit cards, your credit score may suffer and there is legitimate concern you will repay the loan. You could be denied a loan or, at the very least, charged a high interest rate. Be aware that application and origination fees could add to the cost of the loan.

Pros of Debt Consolidation Loans:

• Interest rates for loans should be lower than rates for credit cards.
• Loans can be used to pay off any type of unsecured debt.
• A single payment every month removes stress of late payments.

Cons of Debt Consolidation Loans:

• Eligibility and interest rates are dependent upon your credit score, which could be very low if you have a lot of credit card debt.
• There is little flexibility with loans. A loan is legally binding, while nonprofit debt consolidation and debt settlement can be cancelled at any time.
• Loans come with origination fees that need to be paid upfront. These fees can range from 1%-8% of your loan amount.

Sign-Up Process:

1. Make a list of unsecured debts you would like to consolidate and add each balance (the total amount you owe) to find out how much you need to borrow.
2. Check your credit score. If necessary, take steps to get it over 680. Most likely, that will mean making on-time payments for at least three months so that your score goes up, if possible.
3. Determine the average interest paid on those debts for comparison purposes. If you have a low credit score, it’s not a sure thing your interest rate will improve.
4. Apply to at least three lenders whether it be a bank, credit union or online lender, and then compare the terms against each other and what you are currently paying.
5. Use the loan money to pay off each debt individually.

Debt Settlement

Debt settlement sounds like a sexy option to consolidate debt. Who wouldn’t want to pay half (or less!) of what you owe on credit card debt? But this is considered a desperation measure for a reason. The ads boasting that settlement companies like National Debt Relief can get at least 50% of your debt forgiven, don’t tell the whole story. That figure doesn’t include the fees you will pay for the service; the late penalties you incur while settlement negotiations take place; and whether a creditor will even accept the offers made. The results from this form of debt consolidation definitely are mixed. Do all the math before you choose this option. It should be noted that attorneys also offer debt settlement in addition to companies like National Debt Relief.

Pros of Debt Settlement:

• You will pay less than what you actually owe.
• If the creditor is willing to negotiate and you have enough money to make an attractive offer, this option could take less than a year

Cons of Debt Settlement:

• The creditor doesn’t have to accept your offer, regardless of the amount.
• Debt settlement is highly regulated in 12 states, making it difficult to achieve.
• Late fees and interest add to the balance every month until a resolution is agreed upon.
• By the time you pay fees for the service and the penalties for late payment, your net reduction likely will be closer to 25% of what you originally owed.
• The amount of debt forgiven is taxable income if it is over $600.

Sign-Up Process:

1. The first step is to make a list of the debts you plan to settle and do the math to determine the total amount owed on each account.
2. Research at least three debt settlement companies or attorneys – Clear One Advantage, National Debt Relief and Freedom Debt Relief are the 3 largest – and compare the terms for each.
3. Open an escrow account at your bank. Make sure the account is in your name and you have full control of the money.
4. The debt settlement company must deal with each credit card account individually. Typically, there must be at least 40%-50% of the amount owed already in the account before the debt settlement company can make an offer.
5. If a settlement is agreed upon – even if it’s just one account – you must release the money from escrow.