If you’re in search of an answer to your debt, odds are you’ve heard the term ” debt consolidation” and the chances are the same that everyone you speak to is of a different opinion on the subject.
The reality is, debt consolidation often is a strategy for financial gain that is employed by people who wish to manage credit cards. They may owe thousands or several thousand dollars to card companies – typically, they have multiple credit debts – but choose to consolidate their into one affordable payment by combining debts.
Does it work? Does it have a bad reputation? This is your decision to decide, but before you do that let’s get the record straight on a few of the myths that you might have encountered in your investigation.
- Consolidation of debt is fraud
- The debt-management plans and the debt consolidation are the exact concepts.
- The Debt Settlement method is by far the cheapest method to pay off your debts
- A credit consolidation loan can make you money.
- Debt consolidation can result in higher debt
- Debt consolidation can harm the credit score
Myth No. 1: Debt consolidation is a fraud
Debt consolidation is an acceptable option to reduce debt However, it’s important to investigate the credit counseling firm that provides this method of payment.
Unfortunately, the industry of debt consolidation received a bad rap after the Great Recession in 2008. The emergence of predatory lenders was everywhere and took advantage of those who suddenly were in debt.
Find a trustworthy debt consolidation business that was in operation for a long time before 2008, and ensure that it’s a registered nonprofit 501(c)(3) organization.
The red flag is set up when a Company requests a large amount of money in advance and also plans to stop making payments to its creditors. This infamous method is known as debt settlement and is the root of many of the issues that have arisen since the 2008 financial crisis.
Myth No. 2: Debt Consolidation and Debt Management strategies are not the same thing.
Consolidation of debt or the debt management plan (DMPs) These two plans are the same however, they have some significant differentiators. In order to take on debt consolidation, it is when you get loans (from banks or credit unions) and the rest is up to you. In the ideal situation, you will make use of the money to pay your debts and you only have one monthly installment (the loan).
DMPs are a little different. There isn’t any loan involved. There is still a monthly installment, but it’s to the program of a credit counselor. The credit counselor determines a monthly amount that the borrower is able to pay and decides on the time the process will require (at the same rate of payment) to pay off the debt. The borrower pays the monthly installment to the credit counseling agency, which strategically distributes the money to each creditor according to agreed amounts that can pay off the debt the fastest. Since credit counselors collaborate with creditors on a regular basis and regularly, they have agreements to reduce interest rates and reduce penalties.
Myth No. 3: The Debt Settlement method is the most cost-effective method of resolving your debts
You’ve probably seen billboards that declare “settle your debt for a fraction of what you owe!” On the surface, this sounds like a good deal. If you think it’s too amazing to be true most likely is. What it doesn’t state is that debt settlement firms charge large fees, typically 20 to 25 percent of the settlement amount. The IRS takes any money you save from the settlement as income, so you have to pay tax on the amount.
The companies that negotiate debt settlement stop any payments made to lenders in an approach to negotiate, and they bargain with each creditor separately taking time. In the meantime, the late fees and the interest is accumulating in the increasing amount, and late payments can damage the credit score. The debt settlement will be noted in your credit record over the course of seven years.
The main point of the debt resolution can be that you “hope” to reduce the amount you owe by 50 percent. When you factor in their costs, interest rate penalty (most settlements are between 2 and 3 years), and any additional taxes imposed for any amount that is paid, the real savings are typically around 10%-25 percent.
Your credit score has been ruined for seven years.
The fact that all of this is incorporated into the cost of the settlement makes it a very risky option particularly when you consider that lenders don’t have to accept the terms of the settlement.
Myth No. 4: A credit card for debt consolidation will make you more money
There is a variety that debt consolidation loans come in one of which could be the most effective way of savings, but it requires some investigation. The options are) direct debt consolidation loans from an institution like a bank or credit union or credit union; the second option is) home equity loans, making use of your home as collateral in order to obtain an interest-free loan; and c) secured personal loan.
The goal of every credit consolidation program is to reduce the cost of borrowing. In the cases mentioned above, a credit score is going plays a significant part in the interest rate you are charged. If you’re in the middle of a large amount of credit card debt and you are in a high credit score, your credit score will usually be slashed and you will have to pay a significant interest rate, so keep this in mind when you look around.
If the rate of interest that you pay for debt consolidation loans isn’t significantly lower than what you paid for your credit card then a debt management program may be the better option. There are agreements with DMPs to reduce the interest rate regardless of their credit scores.
Myth No. 5: Debt consolidation can lead to greater debt
The most frequent remark you get is the idea that consolidating debt can’t solve the root of the issue. It is possible to wipe your debts clear, but if you haven’t made changes to your spending habits you may be back to where you began.
Plans for managing debt need credit counseling designed to stop that trend. It is possible to achieve the same by combining debts. There are a variety of tools online that can help you to create a budget as well as provide specific information on financial habits such as establishing an emergency fund. Enhancing your financial knowledge is essential to maintaining a debt-free lifestyle.
Myth No. 6: Debt consolidation harms your credit score
One of the two significant factors that determine the credit score includes payment history as well as credit utilization (how you owe as compared to the amount of credit you’ve got available).
At first, you will notice that your credit score may be a little lower due to the opening of new credit (via a consolidating loan) or closing your existing accounts (through a program to manage debt). However, it is likely to be able to recover quickly and will keep rising as long as you pay on time and pay down the amount of debt you are obligated to.
The initial drop shouldn’t concern you much since you shouldn’t need to open an additional credit line if you’re already in the middle of a debt. It’s important to know what your credit score is at the final stage. If you take out an unsecured debt consolidation loan or management program or debt management program, your credit rating will always be much better than if you’re debt-free.