Most all of us have heard of Debt consolidation. But is Debt Consolidation right for you? What type of debt consolidation should one choose? Is Debt Consolidation effective? What are some of the pitfalls of debt consolidation?
Guess what, sometimes “life” happens and we need to utilize our credit cards out of necessity. A perfect example of this is the Covid Crisis. According to Yahoo Finance, 45% of Americans have taken on more credit card debt during this period. In times like these it’s easy to max out your credit cards. Now what? Most people can’t even keep up with the minimum payments each month. The larger the balance, the larger the monthly payment.
So, is debt consolidation right for you? It very well could be and can be beneficial if done correctly. The average interest on consumers Credit Cards is around 24.10%. the average consolidation, or even better a HELOC loan is anywhere from 5.8 – 18%. That being said, it really can save on monthly payments and interest alike. There are some good ways to do this and some ways that you should stay FAR away from. How would one know? Here are some examples.
- Debt Consolidation companies – Most of us have seen these advertised on TV. They are very compelling in their message and certainly bring hope to those who find themselves in need of getting out of the deep end of debt. When I cautioned about some solutions to stay FAR away from, these are exactly the kind of companies to which I am referring. Not ALL of the advertised companies are bad. But please do your homework before deciding to go this route. The biggest reason I can explain as to why these companies are bad is the fact, they are bad for your future credit scores. Even in their (fine print) disclaimers and on their contracts, they state their process will adversely affect your credit, could result in collections, and you may be subject to being sued over the debt. One may ask why this could happen if they are consolidating your debt? Good question. Fact is, you agree on a monthly payment plan, they collect that monthly payment plan in a trust, then they allow the account to go 30, 60,90,120 days late. They don’t pay your creditors monthly. This will help them gain leverage to try and settle your accounts for a lesser amount. But in the meantime, your credit is absolutely destroyed. A 120 day late on your credit report takes years to recover from. If you find yourself already in this position, please call an expert to see if there is any help to having those derogatory remarks removed.
- Local Credit Unions – If your credit score is still decent, around 620-640, Credit Unions are a great place to use to consolidate your debt. As stated above, these are actual loans, whether a consolidation or HELOC, that the Credit Union will pay directly to you to pay off your creditors. Some Credit Unions will actually handle that step for you if you wish. Now you have combined all your debt into one loan, with a lower monthly payment and interest rate. Not only that but your credit score will likely take a jump because you’ve paid your cards down and maximized your ratio of amount owed to the credit limits on your card. I’ve heard some experts say to pay those credit cards off and close them. What I can tell you from a credit score aspect is DO NOT close those cards. Keeping that credit history makes up 15% of your FICO score. If you close the card, you close the history. So keep those open – Just use them wisely, if at all, from that point forward.
- What if my credit score is too low? There are still options available for you. A simple Google search can find actual lenders (not consolidation companies) to help you bundle all your debt into one payment. However, the down side is that if your credit score is low, you will have an interest rate closer to your Credit Card interest rate. The upside is that you may improve your score by paying off the outstanding revolving credit lines of debt. Check out Free Credit Hub for options.
At the top of this article I posed the question about the pitfalls of Debt Consolidation. Advice as given by the Consumer Financial Protection Bureau (CFPB) states; “Get to the bottom of why you are in debt.” We all know anything can happen at any time to cause one to feel the need to “live” off your credit cards. But, frankly, that’s not biggest reason why people find themselves in this situation. If you spend more than you earn, this is bound to happen. Learn your spending habits and alter them to fit within the parameters of your income. If not, a consolidation loan isn’t right for you. You just may find yourself right back where started.
