The average household is spending in the vicinity of $1,300 a year in credit card interest alone. Hundreds of millions of Americans who gladly took on a credit card believing it will make their lives better end up struggling with monthly payments and damage to their credit scores. If you want to get out from under, debt consolidation may be a solution. For everyone's convenience, here are some FAQs about debt consolidation we all need to know.
What is debt consolidation?
Debt consolidation programs let you take any and all credit card debt and combine it into one single financial settlement, often at less than the total owed. Instead of making multiple payments, you only make one. Note that this program doesn't eliminate debt. It makes debt more manageable.
What does a debt consolidation loan do?
Debt consolidation loans are financial instruments used to pay off debt. It is a method of debt consolidation. You pay off debt but only make a single payment to one source. For these loans, consumers will need to have a form of collateral to secure the loan. This can be a home or commercial property. You may be able to use high value cars, jewelry or other assets.
Is there any other type of debt consolidation?
One notable type of debt consolidation is a program where an account is opened. You would put regular deposits into it. The accumulated funds would be used to pay off credit card accounts by the debt relief program on your behalf.
Will debt consolidation have an impact on my creditworthiness?
This depends on what kind of shape your credit was in when you decided to pursue debt consolidation. But by paying off your debt sooner than later and then keeping regular payments on the debt consolidation agreement and other bills, you get to hold onto whatever shape your credit was in. Consumers drowning in debt should look into debt consolidation before their credit reputation is severely damaged.
You also want to take into account that debt consolidation itself can be subject to the same criteria as getting any other funds from a lender, including background checks. If your credit is shaky, it doesn't mean you're not eligible. In fact, if you use debt consolidation to pay off your cards, the payments will show up on your credit report and potentially improve your standing.
Do keep in mind that, even with debt consolidation, you should meet regular payments on all your debt to maintain and improve your credit rating. This is something that cannot be ignored in today's economy. Bad credit not only keeps you from getting credit cards. It can stop you from getting a mortgage or car loan. You could actually miss out on a job opportunity if the employer thinks your poor credit history makes you a risk. Insurance companies are using credit reports to establish policy rates. Anything you can do - including debt consolidation - to improve your credit standing benefits you.
Can debt consolidation lower my current monthly financial obligations?
In the majority of cases, credit card consolidation will lower monthly payments. in general, consolidation programs provide better interest rates than credit cards. Also, credit balances are expected to be paid off in short periods of time. This means payments can be high. Debt consolidation programs usually provide longer periods of time to pay off the balance. Thus, monthly payments can be significantly lower.
Does debt consolidation minimize the need to file for bankruptcy?
In many cases, debt consolidation programs can avoid further credit issues. It allows you to reduce monthly payments and pay off balances. It does not eliminate your debt, but can provide lower payments. This gives you financial relief and gives you more leverage for managing other financial obligations. You will be in a better position and that could put bankruptcy on the back burner.
Like credit card debt, bankruptcy will have long term effects. First, it stays on a report report for seven years. If you are eventually able to get a new card or some kind of loan, lenders will look at your past bankruptcy and will likely compile heavy interest rates and fees on their services. Certain job opportunities in markets like banking may see the bankruptcy on your credit report and decide to look elsewhere.
Do debt relief organizations use certification organizations?
There are a number of certification organizations for enterprises that offer debt consolidation programs. When consulting with a debt relief organization about a program, ask if it is a member of the Association of Independent Consumer Credit Counselors, the National Foundation of Credit Counselors or the National Association of Certified Credit Counselors.
Can I use debt consolidation for more than credit card debt?
Debt consolidation can be used for different forms of debt. While it is the perfect instrument to stop the struggle with credit card payments, it is also useful for paying medical bills, unsecured debt and accounts that have been turned over to collection agencies. Some circumstances in which debt consolidation cannot be applied include home mortgages, auto loans, student loans and IRS debt. If any debt consolidation rep tells you otherwise, be wary of partnering with them. If your credit card or other debt is dragging you down, debt consolidation may be the solution.
What will debt consolidation cost me?
The debt relief rules set by the FTC in 2010 fully outline what you can expect from a debt consolidation company. To start, it is illegal for any company that offers debt consolidation to collect fees until after the consumer's debt is settled. Unfortunately, it is not unusual for shadier companies to try and bypass this rule with the naive consumer. They will label charges "maintenance fees," "legal fees" or some other dubious title. This is merely a way to make money before their job - paying off your debt - is done. And in many of these cases, they will still charge you for that anyway. Ultimately, the only fees you should pay beforehand are fees for holding funds in escrow.
How long does the process take?
There are many variables that can impact settlements. Amount of debt, creditors and their willingness to negotiate, and more can string out the process. A reputable debt consolidation company with a solid background in the business can give you an estimate, but be suspect of anyone who knows exactly how long it will take and then starts feeding you excuses for why it's taking longer than they promised.
Should I be concerned about the IRS?
Don't go looking for a company that says no, there will be no consequences. The IRS reviews all forgiven debt and, more often than not, considers them taxable income. If you use a debt settlement company to relieve you of thousands of dollars of debt, the IRS may see it as money earned. For more about this, talk with a tax adviser or accountant before you go looking for debt consolidation.
Will this impact my credit?
You do not want to partner with any lender that attempts to low-ball the consequences of debt settlement. Debt settlement could have a negative impact on your credit. A reputable company will tell you what you need to hear. If anyone says debt settlement will not affect your creditworthiness, you should look for another company.
Where does my money go during a settlement?
You pay small amounts of money to creditors, usually on a specific day of the month. With debt settlement, you put funds into an escrow account. During that period, the debt relief company works with your creditors to reach an agreement on how you'll pay off your debt.
Note that the escrow account should be completely in your control. Do not partner with a company that insists it should be in their name and management. Escrow is an insurance policy. It means you're missing payments, but if a satisfactory negotiation can be reached, you have funds to get started.
Exactly how much will I save?
There's no way of knowing. Again, there are too many factors that go into the settlement that can affect outcomes. There can be circumstances where you save nothing at all. The goal should be to save you money, which is why the FTC forbids any type of payment until the debt is paid off. It gives you a better idea of what you will save before you begin turning out fees and charges.
Before diving into negotiations, make sure you need debt settlement. In most cases, counseling or debt consolidation may be the best solution. It won't pay off your bills, but it will not affect your credit score.
If you have explored your options and debt settlement is the answer, try calling your creditors and working something out. Depending on your payment history, they may work with you. If not, calling a debt settlement company may be the way to go.