Want to get out of debt without filing for bankruptcy? You may want to choose to consolidate your debts. Here are some common ways to consolidate credit card debt:
Consumer credit counseling service
The first option for consolidating your debt would be through acquiring the services of a consumer credit counseling service, or a CCCS. Credit counseling is used as an option for consumers who are cannot create a feasible and attainable budgeting plan. Individuals can also utilize this debt relief alternative if they are unable to work out repayment plans with their creditors. This is also a viable opportunity for debtors who are over in their heads in debt.
Typically, the main duty of these organizations is to offer advice and helpful tips on managing an individual's money and debts. Certified credit counselors who are specially equipped on budgeting, financial management, and consumer credit provide these services to empower their customers into living a debt-free existence. They also hold free seminars, workshops, and educational material on the topics at hand. More often than not, these agencies can be found in local universities, credit unions, housing authorities, military bases, and in local bureaus of the US Cooperative Extension Service.
Once an individual has set a formal sit-down meeting with a credit counselor, they will go over the entirety of the customer's financial position, and create a financial plan specifically fit to the individual's needs. The initial counseling may last for an hour, and the counselor may ask for succeeding sessions to track the customer's progress.
Debt management plans
A debt management plan, or a DMP, is the next logical step a credit counselor recommends to the customer if the latter has too many bills to pay or is financially incapacitated. In a DMP, all of an individual's debts are combined into one loan. Instead of making separate multiple payments to, say, ten different creditors, the debtor will just be making one payment towards the credit consolidator. The latter, in turn, will use the borrower's payments to pay all their unsecured debts. The payment plan depends on an agreed schedule between the customer and their creditors. It typically takes 48 or more months before all of the debts are paid off.
Aside from smaller payments, being enrolled in a DMP allows a debtor to pay for a lowered interest rate. Fees may also be stopped from adding up towards the balance. Prior to the making the payments to the agency, the credit counseling firm is required to send a proposal to the individual's creditors, illustrating their offer in full detail. Customers are highly encouraged not to send money to the CCCS until their creditors have approved the proposed payment plan. The credit consolidators may say that their offer has been approved, but it is always best to verify the information with the creditors, to prevent your money from going elsewhere.
It is the creditor's prerogative to “re-age,” or convert the debtor's accounts to current status, while the program is running. You may need to find out with your creditor if this can be made possible. You can start by asking them how long should your account be enrolled in the DMP before it can be re-aged, or how many payments would it take for them to bring the account current. Of course, just because the account has been brought to current status doesn't mean that your credit would be sparkly clean; past delinquencies will still be reflected on your credit report.
The customer can enroll his or her accounts in this program only after careful and deliberate assessment of their financial situation, and if the counselor has provided the debtor with tailor-made advice regarding the matter. Of course, if you have been recommended to avail of this plan, you are discouraged to apply for or use any additional credit in the entire duration of the program. Doing so will add unneccessary stress on your end, as you may end up paying more than you can already afford.
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How do debt management plans work
A word of caution
Now, just because a credit counseling service claims that it is “non-profit” means that its services are actually free, inexpensive, or even legitimate. Some agencies charge very high fees that the debtors can hardly afford, given their current financial status—and they may even fail to follow through to their promises after the hapless customer has paid their dues. Another tactic that fraudulent companies may use is by encouraging their customers to make “voluntary contributions,” which in reality serve as administrative or service fees. Some of these firms may even misrepresent themselves by omitting certain information or choosing not to inform the customer of certain fees.
It pays to do research in order for you not to be a victim of these schemes. Make sure to check the company's records with the Better Business Bureau or your local Attorney General. As you do so, you can be able to see if the company in question has received complaints from previous customers. You may also be able to find out if the consumer counseling service is authorized to do business in your area.
Home equity loan
Using a home equity loan, or an HEL, is another common means of consolidating debts. Also known as a second mortgage, a home equity loan enables an individual to borrow a certain sum of money, using their home equity as collateral. Home equity refers to the difference between the house's actual market value and the unpaid balance of the mortgage amount. It is the lender's duty to determine a house's market value, and usually he or she will allow an interested individual to borrow 50 to 80% of this amount, though some lenders would go over and beyond a hundred percent. After that has been settled, the lender will deduct how much the borrower actually owes on their home, in reference to mortgage payments.
There are two types of HEL's: a closed-end home equity loan and an open-end home equity loan. With a closed-end HEL, an individual is entitled to borrow the entire lump sum of the amount. The deciding factors on acquiring this type of loan include the borrower's current income, credit history, and debt-to-income ratio. The borrower is entitled to repay this loan in fixed installments on a monthly basis, for a certain amount of time. Some of these loans can even be amortized for up to 15 years.
An open-end home equity loan, on the other hand, utilizes the concept of revolving credit, much like how a credit card works. Here, an individual can determine when and how often to borrow against the home's equity. He or she has a particular credit limit as well, wherein they are allowed to apply for up to a certain amount only. This is also known as a home equity line of credit. An individual may choose to repay for up to 30 years, and at variable interest rates.
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Home equity loans versus home equity lines of credit
Balance transfers
A short-term solution to consolidating debts is through “rolling them over.” The process is quite simple: an individual applies for a credit card that has a zero or single digit initial interest rate, and he or she uses it to pay off all their other credit cards, medical bills, personal loans, and other unsecured debts.
Opting to do a balance transfer requires a lot of tenacity and discipline on the debtor's end. One suggested way to successfully create a balance transfer is by adding up all the minimum payments due for each loan. Add a certain amount that can be freed up from your current budget, so it can be paid towards the loans. After all, you need to pay for more than the minimum amount due on all the combined loans if you want to see results. Paying for this combined amount for these debts as each month progresses allows you to take care of your debts, at a minimal interest rate.
For your consideration
Using a home equity loan to consolidate your debts may seem like a good idea. After all, it can also help eliminate fees and charges, and reduce interest on your unsecured debts. However, you need to make sure that you can make the regular monthly payments on this loan if you do decide to choose this alternative. Defaulting on your home equity loan can spell big trouble, as you may end up losing your home. You can also utilize your HEL only if you plan to stay in your home for a very long time. You may end up being “flipped” if you decide otherwise. When this happens, the value of the loan exceeds the value of the home. If you decide to sell the house after consolidating your debts, you are required to repay the portion of the equity that was used, not to mention the amount that is still owed on the mortgage.
On the other hand, we cannot emphasize enough the importance of caution and discipline in reference to having a balance transfer. Some creditors may offer the minimum interest rate for a limited period of time only; make sure to carefully read the fine print because signing anything. It is also important to make your payments to this credit card on time; the promo, after all, may expire once you default on a payment, and standard interest rates may apply once the program period has lapsed.
In choosing these last two options, you may stand the chance of taking on more debt instead of actually eliminating it. After all, seventy percent of Americans who use HELOC or other loans to pay off other loans end up having the same, if not higher, debts within a span of two years.