It’ would be to use a consumer credit counseling agency to consolidate your debts.
However, if debt consolidation is done poorly or if you choose the wrong credit counseling agency, you could end up in an even worse situation.
Here are eight things you need to know about using a credit counseling agency to make sure you avoid creating more problems.
1. All credit counseling agencies are not the same
Just like there can be big differences between different laptop computers, there can the big differences between credit counseling agencies. You need to be very careful in choosing which one to work with. Your best choice would be a non–profit agency that belongs to either the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).
The reason why it’s best to choose an agency that belongs to one of these organizations is because they require their members to adhere to strict standards as set forth by the Council on Accreditation or some other approved third-party. This also means that their counselors must have passed a very comprehensive certification program.
Even if the agency you’re thinking of working with is a member of one of these two organizations it still pays to be careful. The one you choose should be organized, send statements and payments on time and offer helpful consumer education materials in addition to debt consolidation.
Here’s a video that could help you make sure you choose a reputable credit counseling agency.
2. How credit counseling will consolidate your debts
Using a credit counseling agency is basically using a third-party payment system. These agencies do not make loans nor do they provide debt settlement. However, they will negotiate with your lenders to get your interest rates reduced and any fees waived. And you may be offered what’s called a debt management plan (DMP).
If you accept a DMP this will effectively consolidate your debts because you will no longer be required to pay your lenders. Instead, you will send the credit counseling agency one payment a month until all of your debts have been paid off.
3. You may not need a DMP
The debt counselor at your consumer credit counseling agency should first review your finances to see if there might be a better alternative than a DMP. For example, if you have money left over after you’ve subtracted your expenses from your income then your counselor might help you develop a budget that would allow you to become debt free without a DMP, which could take as many as five years to complete. In fact, if your counselor does not discuss alternatives or if he or she does not seem to be compassionate and knowledgeable then you might want to request a different counselor.
4. This form of debt consolidation is both efficient and simple
If you do have a DMP your payment remains constant. You won’t need to worry what the sum of your payments will be each month. It will be the same amount until all of the lenders in your plan have been repaid. When one lender has been repaid the remaining ones will receive a bigger portion of your payment and this will help speed up the repayment process. In addition, your lenders won’t be calling you to demand payments as this typically stops once they understand that you have a debt management plan.
One of the most important things to understand is that all of the lenders in your plan will close your accounts. This means you may need to learn to live without credit cards until you complete your DMP. In addition, you will not be allowed to open any new accounts. When you stop to think about it this just makes sense. If you’re continuing to charge while you’re in the process of repaying your debts, you would basically be spinning your wheels. You may be allowed to keep one card to emergencies but it probably will have a very low balance.
6. You’ll still have some work to do
You will still be receiving account statements from the lenders that are in your plan. It’s important that you send them to your agency. The reports you get from your credit counseling agency won’t reflect the interest that you’re still being charged. This means if you don’t submit your statements, the reports your agency gets will be seriously different from what you see in your bank statements. Some people – who didn’t carefully monitor their account statements – had a rude awakening when they thought they had completely paid off their debts only to find they still owed thousands of dollars.
7. Credit counseling isn’t right for everyone
The sad fact is that consumer credit counseling might not be for you.
For one thing, the majority of your debts must be unsecured debts such as personal loans, credit cards, department store cards, payday loans and personal lines of credit. If the bulk of your debt are either secured debts (think auto loan and home mortgage) or debts such as unpaid child support, spousal support, alimony, back taxes or student loan debt then a DMP can’t help you. In addition, it’s important that you feel confident that you can make your payments not for just a few years.
8. A DMP is better than filing for bankruptcy
When you choose debt consolidation through a DMP it tells lenders that you’re paying 100% of your debts, which is a good deal different from discharging them in a bankruptcy. However, your credit reports may take a hit if your monthly payments are less than what you would have normally paid. Finally, this form of debt consolidation is not factored into your credit score but some lenders may add notations that you’re paying a third party. Unfortunately, this can be a bit of a red flag to prospective lenders or anyone else who is reviewing your reports. For that matter, some lenders won’t make new loans until you complete your plan.
Commonly Asked Questions About Credit Counseling
Q. What does credit counseling cost?
A. It costs very little to have your debts consolidated through a consumer credit counseling agency. For example, most of the non-profits charge a one-time, set-up fee of maybe $35 and then a monthly maintenance fee of $10. When you stop to think how much the credit counseling agency is doing for you, these charges are practically insignificant. In comparison, if you were to use a debt settlement company to consolidate your debts you could be charged anywhere from 15% to 25% – depending on the total of the debts being settled.
Q. What are credit counseling services?
A. One popular alternative to a credit counseling agency is to use a credit card for debt consolidation. Of course, this can be helpful only if the majority of your debt is credit card debt. But when this is the case you might be able to transfer your high-interest credit card debts to a new card with a lower interest rate. What is even better is to transfer all of your credit card debts to a 0% interest balance transfer card.
Q. Is debt consolidation through credit counseling a loan?
A. As noted in this article, debt consolidation through a consumer credit counseling agency is not a loan. It’s using a third-party to pay off your debts. However, a third way to achieve debt consolidation is to get a debt consolidation loan. Depending on your situation you might be able to get either an unsecured personal loan or a secured loan such as a home equity loan or a home equity line of credit (HELOC). Interest rates are currently at almost all-time lows. For example, it’s possible to get a personal loan within APR as low as 5.99%.
Q. Is debt consolidation through credit counseling a good idea?
A. If you’re struggling under a big load of debt then debt consolidation should be a good idea. However, it’s important to choose the right type of debt consolidation. Using a credit card balance transfer or getting a debt consolidation loan may end up costing you more even though you have a lower interest rate. The reason for this is that it will likely take you longer to repay the debt. On the other hand, using a consumer credit counseling agency will cost you practically nothing but it could take you as many as five years to complete your plan,
Q. Can you do credit counseling with a poor credit score?
A. Again, this depends on the type of debt consolidation you choose. As an example of this you could have a credit score down in the 400s and could still consolidate your debts through consumer credit counseling. But that low credit score could keep you from getting a personal loan with a decent interest rate or any loan at all. You might be able to get a HELOC or home equity loan even with a poor credit score as you would be using your home to secure it. A balance transfer will probably be out of the question.
Q. Could I do debt consolidation with my student loans?
A. If you’re having a hard time repaying your student loans, then debt consolidation could be a very good option. If your loans are federal student loans, the government offers Direct Consolidation Loans. These loans have fixed interest rates which is based on the weighted averages of the interest rates on the loans that you are consolidating, rounded up to the nearest 1/8 of a percent. In most cases the interest you would pay on a Direct Consolidation Loan will be much less then the interest rates you’re currently paying. Also, these loans offer different repayment options including several where your payments would be based on your income.
Q. What are the dangers of debt consolidation?
A. There are several dangers of debt consolidation. The biggest is what happens if you were to stop paying on your DMP, your credit card or your debt consolidation loan. If you have a DMP and miss a payment, nothing may happen. Some lenders will simply let you resume your payments the following month. However, some may drop you from the program immediately. Missing a credit card payment has very serious consequences as it could drop your credit score by as many as 100 points. But the worst alternative is to miss payments on a HELOC or home equity loan as the lender might actually foreclose on you – though most will sue you instead.