Debt consolidation is a financially sound way to pay off credit card debt. It lowers your interest rate and monthly payment, allowing you to pay off your debts more quickly. Consolidate your debts for free over the phone or online.
What Exactly Is a Debt Consolidation Plan?
Debt consolidation combines multiple high-interest credit card bills into a single low-interest monthly payment. Paying less interest saves you money and allows you to pay off your debt more quickly.
Debt consolidation can be done with or without the use of a loan. A debt management plan, a debt consolidation loan, or a debt settlement program are all effective and affordable ways to manage credit card debt.
A debt consolidation program can help you regain control of your finances if you are unable to make more than minimum payments on your monthly credit card bills.
Debt Consolidation Programs: What They Are and How They Work
Debt consolidation programs come in three varieties:
Debt consolidation for non-profits
Loans for debt consolidation
Settlement of debts
The first two are for people who have enough money to pay off their debt but need help creating and sticking to a budget.
Debt settlement, the third option, is used in desperate situations where debt has become unmanageable.
If you’re not sure which debt consolidation option is best for you, contact a nonprofit credit counseling organization like InCharge Debt Solutions. A certified counselor will review your income and expenses, assist you in creating an affordable monthly budget, and provide free advice on which debt consolidation program will help you get out of debt.
The National Federation of Credit Counseling’s Chief Executive Officer, Rebecca Steele, stated, “Credit Counseling will develop an action plan that is tailored to your exact needs.” “When you’re in debt, you need to know your budget, what it’ll take to pay off your debts, and how you can set up fair, affordable payments to get there.” Credit counselors should help you with that.”
Alternatives to Debt Consolidation Programs
Each segment of the debt consolidation industry is represented by InCharge (nonprofit debt consolidation), Avant (debt consolidation loan), and National Debt Relief (debt settlement). We’ll go over the benefits and drawbacks of each to help you understand the differences between the three types of debt consolidation programs and how to get started.
Debt Consolidation for Nonprofits
Consolidation for nonprofits is a payment plan that combines all credit card debt into a single monthly bill with a lower interest rate and payment. Nonprofit credit counseling agencies offer these programs, and they work with credit card companies to come up with a lower, more affordable monthly payment for you. The purest form of debt consolidation is nonprofit debt consolidation. It’s more like a service than a loan, and it’s a more pure form of debt consolidation than debt settlement. You have the support of a non-profit organization that can answer your questions and help you navigate through difficult financial situations.
Benefits of Nonprofit Debt Consolidation: This is not a loan, and your credit score is not taken into account when determining eligibility.
Interest rates that are lower (around 8%, sometimes less) help to reduce monthly payments.
Credit counselors can help you create a monthly budget that is within your means.
To prevent this from happening again, financial education was offered.
Cons of Debt Consolidation for Nonprofits:
If you miss a monthly payment, the creditor may cancel all of your concessions.
There is a one-time setup fee of $50-$75, as well as a $32 monthly service fee, but the interest savings should more than cover the fees.
Except for one emergency card, you must stop using credit cards.
Process of Registration:
Online debt consolidation or calling a counselor at a nonprofit credit counseling agency like InCharge Debt Solutions are the easiest ways to enroll.
Allow the agency to check your credit report for a list of your credit card debts and monthly payment information.
To figure out how much money you have available for credit card consolidation, gather information about your monthly income and expenses.
Be prepared to answer questions about your debt-reduction goals and timeline.
Credit counselors will evaluate your situation and determine whether or not you are eligible for a nonprofit debt consolidation program. If this is not the case, the counselor may suggest a loan, debt settlement, or bankruptcy as a solution.
Loan for Debt Consolidation
Taking out a single large loan and using it to pay off several credit card debts is the traditional method of credit consolidation. Because you only have one loan, a debt consolidation loan, you only have one monthly payment, which makes paying your bills much easier. This, however, can be difficult. Lenders rely heavily on your credit score to determine whether or not you will be able to repay the loan. If you have trouble paying your credit cards, your credit score may suffer, and there may be legitimate concerns about whether you will be able to repay the loan. You might be turned down for a loan or be charged a high interest rate. Be aware that application and origination fees may increase the loan’s cost.
Benefits of Debt Consolidation Loans: Loan interest rates should be lower than credit card interest rates.
Any type of unsecured debt can be paid off with a loan.
The stress of late payments is alleviated by making a single payment each month.
Debt consolidation loans have a number of drawbacks.
Your credit score, which may be very low if you have a lot of credit card debt, determines your eligibility and interest rates.
Loans have a limited amount of flexibility. A loan is a legally binding agreement, whereas nonprofit debt consolidation and debt settlement agreements can be canceled at any time.
Loans come with upfront origination fees that must be paid. These fees can range from 1% to 8% of the total loan amount.
Process of Registration:
Make a list of any unsecured debts you want to consolidate, then add each balance (total amount owed) to figure out how much you’ll need to borrow.
Examine your credit report. Take steps to raise it above 680 if necessary. Most likely, this will entail making on-time payments for at least three months in order to improve your score.
Calculate the average interest paid on those debts to use as a comparison. If you have a low credit score, your interest rate is unlikely to improve.
Apply to at least three lenders, whether they are banks, credit unions, or online lenders, and compare their terms to what you are currently paying.
Use the money from the loan to pay off each debt separately.
Debt settlement appears to be an enticing option for debt consolidation. Who wouldn’t want to pay off their credit card debt in half (or less!) the time? But there’s a reason this is regarded as a desperate measure. Advertisements claiming that debt settlement companies like National Debt Relief can forgive at least 50% of your debt don’t tell the whole story. This figure excludes the fees you’ll pay for the service, any late fees you’ll accrue while settlement negotiations are in progress, and whether or not a creditor will accept your offers. The outcomes of this type of debt consolidation are unquestionably mixed. Make sure you’ve done your homework before deciding on this path. Attorneys, in addition to companies like National Debt Relief, provide debt settlement services.
Pros of Debt Settlement: You’ll pay a fraction of what you owe.
This option could take less than a year if the creditor is willing to negotiate and you have enough money to make a compelling offer.
It can prevent debt collectors and creditors from calling you.
It will assist customers in avoiding bankruptcy.
Debt Settlement’s Drawbacks:
Regardless of the amount, the creditor is not obligated to accept your offer.
In 12 states, debt settlement is heavily regulated, making it difficult to achieve.
Every month, late fees and interest are added to the balance until a resolution is reached.
Your net reduction will most likely be closer to 25% of what you originally owed by the time you pay service fees and late payment penalties.
If the amount forgiven exceeds $600, it is considered taxable income.
Process of Registration:
The first step is to make a list of the debts you want to pay off, then do the math to figure out how much you owe on each one.
Clear One Advantage, National Debt Relief, and Freedom are three debt settlement companies or attorneys to look into. Debt Relief, Debt Consolidation, and Debt Consolidation are the three largest – and the terms for each are compared.
At your bank, open an escrow account. Ascertain that the account is in your name and that you have complete control over the funds.
Each credit card account must be handled separately by the debt settlement company. Before a debt settlement company can make an offer, the account must typically have at least 40% to 50% of the amount owed already in it.
If a settlement is reached – even if it’s only for one account – the funds must be released from escrow.
What to Look for When Choosing a Debt Consolidation Plan
There are numerous paths to debt relief through debt consolidation, but there are also numerous detours that will exacerbate your problem if you are not careful.
Keep an eye out for credit repair scams that promise impossible-to-achieve results. In this industry, there are many advertisements that appear to be too good to be true… and it’s due to the fact that they are! Don’t be fooled by them.
Before enrolling in a debt consolidation program, make sure that the agency, bank, credit union, or online lender is there to help you, not to profit from you.
You should inquire about how long they’ve been in business, their track record of success, what online reviews say about their customer service, and how much money you’ll save by using their service.
Because you can do any of these debt consolidation programs yourself, the last question is the most important. So, if the fees charged make the exchange break-even, there’s no reason to sign up. A program’s total cost should save you money while paying off your debt.
What is the Process of Credit Consolidation Companies?
Man with a long list of debts that need to be paid off
Consumers use credit consolidation companies to find an affordable way to pay off credit card debt while still having enough money to cover basic expenses such as housing, food, clothing, and transportation.
In the debt-relief industry, the term “credit consolidation companies” encompasses a wide range of services. They range in size from large national banks to small nonprofit counseling organizations, with several stops in between, and they provide a variety of credit card debt relief options.
To make things easier, credit consolidation companies can be divided into two categories:
Those who consolidate debt with a credit score-based loan
Those who consolidate debt without taking out a loan and do not use their credit score in any way
The first category includes banks, credit unions, online lenders, and credit card companies. They provide debt consolidation loans or personal loans that are repaid in monthly installments over a period of three to five years.
To determine your creditworthiness, they look at your income, expenses, and credit score. The most important number in that equation is your credit score. The higher the number, the better. If your credit score is above 700, you should be able to get a loan with a reasonable interest rate. If your credit score falls below 620, you will be charged a much higher interest rate or may not be eligible for a loan at all.
Nonprofit credit counseling agencies like InCharge Debt Solutions fall into the second category, which includes companies that provide credit card consolidation without a loan. When evaluating your options, InCharge credit counselors consider your income and expenses but not your credit score.
They suggest debt relief options such as a debt management program, debt consolidation loan, debt settlement, or bankruptcy filing based on the information provided.
InCharge counselors work with credit card companies to reduce the interest rate on the debt and lower the monthly payments to an affordable level if the consumer chooses a debt management program. Debt management programs can help you get out of debt in three years, but they can also take up to five years.
Counselors may refer you to a debt settlement company or a bankruptcy lawyer if your debt has become out of control.
Debt settlement companies advertise on television and radio with enticing claims like “We’ll settle your debt for half of what you owe!” but these claims are false. Creditors are not obligated to accept settlement offers, and some will refuse to do so. The amount of debt forgiven is frequently far less than what was promised.
When all other options have been exhausted, bankruptcy is the “nuclear option.” If there is any other way for a consumer to pay off their debt in less than five years, they should take advantage of it. If not, declaring bankruptcy may be a viable option.
Bankruptcies are extremely successful – in 2017, 95 percent of Chapter 7 filings had their debts discharged – and give consumers a fresh start with their finances. However, the bankruptcy filing will remain on your credit report for 7-10 years, making it extremely difficult to obtain credit during that time.
The Best Debt Consolidation Firms
Debt consolidation programs provide consumers with a variety of options for debt relief. Making the best decision necessitates an honest evaluation of your income and spending habits. To put it another way: a budget!
If you can create a budget that accurately reflects your spending, you’ll be in the best position to figure out how much money you can set aside each month to pay off debt.
Here are some companies that provide various debt consolidation options.
Nonprofit Debt Consolidation TYPE: InCharge Debt Solutions
HOW IT WORKS: To see if you qualify for a debt management program, a credit counselor will ask you questions about your income and expenses. You agree to have InCharge deduct a monthly payment from your account, which will then be distributed to your creditors in agreed-upon amounts if you enroll in the program. Credit card companies agree to reduce interest rates to around 8% (sometimes even lower) in exchange for lower monthly payments.
FEES: There is a one-time setup fee of $50-$75. The monthly service fee is approximately $30.
TERM: 3-5 YEARS, WITH NO PENALTY FOR PAYING IN ADVANCE.
IMPACT ON CREDIT SCORE: Credit scores typically improve after six months of on-time payments. Due to the closure of all but one of your credit card accounts, there will be a drop at first.
TYPE: Debt Consolidation Loan Avant TYPE: Debt Consolidation Loan Avant TYPE: Debt Con
HOW IT WORKS: To get a loan, you must first fill out an application and be approved. Your income and expenses are considered, but your credit score is usually the most important factor. Avant requires a minimum score of 580 and a yearly gross income of more than $20,000 to be considered. If you’re approved, you’ll get a fixed-rate loan to pay off your credit card debt. To repay your loan, you make monthly payments to Avant.
FEES: Interest rates range from 9.95% to 35.99%. 4.75 percent origination fee Fee for late payment: $25.
TIME ALLOWED: 2–5 years, with no penalties for paying early.
IMPACT ON CREDIT SCORE: Applying for a loan has no impact on your credit score, but missing payments will. Making on-time payments, on the other hand, should help.
TYPE: Debt Settlement NATIONAL DEBT RELIEF
HOW IT WORKS: You must have at least $7,500 in debt to qualify. You open an escrow account and make monthly payments to it instead of your creditors (as determined by National Debt Relief). NDR negotiates with your individual creditors to try to get them to accept less than what is owed once the balance has reached a sufficient level. The debt is paid from the escrow account if a settlement is reached.
FEES: 15% to 25% of the original debt amount. There are no other fees listed on the company’s website.
TIME TO COMPLETE: 2-4 YEARS
IMPACT ON CREDIT SCORE: It’s a major negative that lasts seven years. As your bills go unpaid and accounts become delinquent, expect your credit score to drop 75-125 points.
Which Debt Consolidation Option Is Best for Me?
Your situation will most likely determine the answer. Each program is tailored to a specific person.
In most cases, nonprofit debt consolidation works. There is very little risk, and the program is truly intended to assist. You can cancel at any time and continue to use the other programs as alternatives.
You are converting your credit card debt into loan debt when you take out a debt consolidation loan. This effectively eliminates the option of later enrolling in a nonprofit debt consolidation program.
Debt settlement necessitates your complete commitment. You must create bargaining leverage by stopping all payments to your creditors in order for it to work. There’s no turning back once you’ve started down this path, but if your debts are already in collections, settlement and bankruptcy may be your only option.
Credit counseling can assist you if you are unsure which program is best for you. Credit counselors are licensed professionals who are well-versed in these programs. They will go over your finances with you, answering any questions you may have, offering advice, and finally making a recommendation based on the information you have provided.
After all, the program that is right for you is the one that gets you to the finish line.
Most Commonly Asked Questions
What Exactly Is A Debt Consolidation Firm?
Are There Any Government Debt Consolidation Programs That Aren’t For Profit?
Which is preferable: Debt Consolidation Or Balance Transfer Cards?
What Should I Do To Begin Debt Consolidation?
Is it possible to enroll in debt consolidation programs over the internet?
Which Debt Consolidation Programs Can Help You Get Out of Debt If You Have Bad Credit?
Will My Credit Score Be Affected If I Join A Debt Consolidation Program?
Which Debts Can A Debt Consolidation Program Help You With?
Are there any costs associated with debt consolidation programs?
Is it Possible to Terminate My Debt Consolidation Program?
How Long Does It Take To Get Out Of Debt With A Debt Consolidation Program?