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Credit Card Debt Consolidation Pros And Cons – Learn about the pros and cons of both debt settlement methods to help you decide which is best for you.
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Credit Card Debt Consolidation Pros And Cons
As fanciful as it sounds, it cannot be emphasized enough that when you are drowning in debt, you absolutely need to find a viable solution. You’ve heard of two common types of help – debt consolidation and credit counseling – and you’re wondering which one is right for you. You have to make a choice and move on.
What Is Debt Consolidation & How To Do It
But understand that this is not an either/or situation. Credit counseling can actually help you choose a plan of action that includes some form of debt consolidation.
Basically, debt consolidation involves combining multiple debts into one, making it easier to pay off the debt. There are three main ways to do this—debt management programs, debt consolidation loans, and debt settlement plans—but we’ll focus on the first two.
Debt management plans include a carefully designed payment schedule that consolidates credit card debt into one affordable monthly payment.
These programs are started by a nonprofit credit counseling organization that works with a credit card company (or companies) to lower the interest rate on the debt and achieve an affordable monthly payment.
Credit Card Debt Management Plans
The consulting agency receives your monthly payments and distributes them to each creditor in an agreed amount.
In such programs, you agree to stop using your credit cards. The trade-off is that you get lower interest rates and lower monthly payments on your credit card debt, allowing you to pay off your debt in 3-5 years.
Please note that debt management plans are NOT loans and you do not receive any discount on the amount you owe. They try to eliminate debt by reducing interest and monthly payments.
Debt consolidation loans, on the other hand, are exactly what the term implies: you borrow to pay off debt.
Choosing Between A Loan And A 0% Apr Card To Get Out Of Debt
Get one big loan that allows you to pay off all your credit card debt. Then pay off the large loan in one monthly payment. These loans come in a variety of forms, but are usually made through home equity or personal loans.
Debt settlement is a last resort for debt consolidation. An attorney or debt settlement company helps you and your lender agree to pay less than you owe. However, there are a lot of problems with this plan, not the least of which is that your credit score drops significantly (by about 100 points, and defaults are a negative on your credit report for seven years).
All debt consolidation methods make the debt settlement process easier. Making monthly payments is easy to track and helps prevent late fees and annoying collection calls.
Debt management programs lower the interest rates on credit card debt to make it more affordable and create a schedule to pay it off in full. If you don’t use credit cards during the process, you won’t hurt yourself or increase your debt. Over time, this method improves your credit score because you will make your payments on time.
What Is Debt Consolidation?
Debt consolidation loans can take not only your credit cards, but all of your unsecured debt, including student loans and medical debt, and roll them into one debt for one monthly payment. This makes budgeting a simple process. If it is a home loan, the interest paid is tax deductible.
“It won’t eliminate all of your debt, but with a lower interest rate, it can provide significant savings in the long run,” said Crediful.com CEO Cheyne Steiner. “I recommend going this route if you have good credit and qualify for a low interest rate, especially if one of your debts is charging a high rate.”
Debt management plans only apply to credit cards, and if you default, you lose the interest rate agreement with the card companies. This method also requires discipline, as you only leave revolving credits for emergencies. Most credit card companies will lower your interest rate, but they don’t have to.
Debt consolidation loans are usually secured loans, and they certainly are in the case of a home equity loan. You are putting your home at risk if you don’t make your payments. If you get an unsecured loan, the interest rate and monthly payment will be higher. Your credit score will also decrease if you participate in a debt consolidation program.
Pros And Cons Of Consolidating Credit Card Debt
Be careful what you include in debt consolidation. If you have no-interest or low-interest loans, such as medical bills, and you combine them with high-interest debt, you negate some or all of the benefits. Also, don’t focus so much on your monthly payments that you don’t look at how much interest you’re paying. A long-term loan typically lowers your monthly payments but increases the total amount you pay for the loan. Consolidating federal student loans eliminates protection and all associated repayment options.
One potential problem with debt consolidation is that it doesn’t address the behavioral issues that got you into debt in the first place, notes CPA Ben Watson of DollarSprout.com. When trying to get out of debt, you can’t charge multiple lines of credit at the same time. Also, Watson says, beware of plans that involve paying extra money in “closing fees.”
If the idea of borrowing money to pay off debt seems counterintuitive, it is. At the very least, you might want to talk to someone who can explain your options and help you choose a path to a more stable financial footing.
That’s exactly what credit counseling does. A credit counselor discusses your financial situation to find the best solution for you. You’ll need to give your credit counselor a lot of information—how much you owe, how much you earn, what your expenses are, and what assets you have that can help you eliminate or reduce debt.
Credit Card Refinancing Vs. Debt Consolidation: What’s The Difference?
It’s hard to be sure you’re on the right track if you don’t understand how bad your situation is and what your options are. If you’ve missed bills, are struggling to make the minimum monthly payment, or are overwhelmed, credit counseling can be a great place to start.
Credit counseling can help you create a workable budget, understand your credit history and credit score, create a plan to pay off your outstanding bills, and help you create a debt management plan with your creditors. Finally, the game may involve debt. reinforcement.
You want to make sure that the person giving you advice has your best interests at heart. Ask how credit counselors are paid. Do they get paid based on whether you follow their recommendations? You want to make sure the advisor has your best interests in mind. Credit counselors may charge a fee, but many nonprofit services can be provided for free or at a reduced cost.
It is illegal for a credit counselor to ask for an upfront fee before providing services. Look elsewhere. Other warning signs are if the company asks for voluntary contributions for its services, demands a commitment from the government or law enforcement agencies when they don’t, or promises to get out of debt quickly.
Pros And Cons Of Debt Consolidation
A credit counselor can also prove helpful, but it’s important to remember that hiring a counselor will cost money and “there are many free resources available to help you learn the ropes of debt management,” said Oliver Brown, a credit card industry analyst. Inside. “If you decide to go the credit counseling route, do your homework. Most credit counseling agencies are not for profit, but there are companies that just want to make money.
If you think you have your debt situation under control and just need to simplify and lower your monthly payments, debt consolidation seems like a good way to go. Steiner recommends this approach if you have good credit and can qualify for a low interest rate.
The more complex your circumstances, the more important credit counseling is, if only for your peace of mind. If you need to fix a problem right away and learn how to get back on track, a financial professional can put you on the right path to financial stability.
In his more than 40-year newspaper career, George Morris has covered everything from Super Bowls to evangelists to World War II veterans to everyday people with extraordinary stories. His work has received numerous awards from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays back quickly when he can’t, and is happy to advise you on how you can do the same. Bankruptcy is almost always the worst situation when dealing with financial problems in general. , debt consolidation is better.
Personal Loans Vs. Credit Cards: What’s The Difference?
Before filing for bankruptcy or debt consolidation, it’s important to understand the differences and learn the pros and cons.
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