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Are Debt Consolidation Companies Worth It?

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Are Debt Consolidation Companies Worth It?

Debt consolidation companies often sell programs to settle debts that could have a negative impact on your credit score and your wallet.

Written by Erin El Issa Senior Writer Personal finance, data analysis credit card Erin El Issa writes data-driven research on personal finances, credit cards investments, travel, as well as student loans. She is fascinated by numbers and strives to demystify data sets to assist people in improving their financial lives. Before becoming a Nerd during 2014, she worked as a tax accountant and freelance personal financial writer. Erin’s writing has been featured as a result by The New York Times, CNBC as well as the “Today” program, Forbes and elsewhere. In her free moments, Erin reads voraciously and tries in vain to keep up with her two children. Erin is from Ypsilanti, Michigan.

And Jackie Zimmermann Jackie Zimmerman is a former personal-loans and small-business writer for NerdWallet. Her writing has been featured by USA Today and Money.com.

Aug 6, 2021

Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years working at The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Previous experience included news and copy editing at several Southern California newspapers, including the Los Angeles Times. She earned a bachelor’s degree in mass communication and journalism from The University of Iowa.

A majority of the products we feature come from our partners who compensate us. This affects the products we feature as well as the place and way the product appears on a page. However, this does not affect our assessments. Our opinions are our own. Here’s a list and .

When you’re struggling to make repayments on debt, you might be tempted to find a quick and easy solution. In the process, you’ll likely run across businesses that promote debt consolidation. However, the majority of “debt consolidation firms” offer a more controversial product called debt settlement.

For most consumers, is an unwise choice. It should be considered only after you’ve exhausted alternatives. It’s costlyand could seriously damage your credit score, and any savings can take years to be realized.

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Debt consolidation vs. debt settlement

One of the main differences between debt consolidation and debt settlement is who is in the deciding role.

Understanding the differences between the two approaches will ensure that you don’t wind in a financial loss due to an outcome or service you aren’t expecting.

Debt consolidation is a do-it-yourself strategy that you control. Incorporating a debt settlement program puts your finances in the hands of companies offering debt relief that could or might not be able to successfully settle your debt.

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Programs to consolidate debt

Businesses that bill themselves as companies that consolidate debt, such as and , in reality, sell debt settlement programs which make you stop paying your bills and instead pay your monthly bills into a separate savings account.

Once there’s enough money in the account, usually after six months, the debt settlement company begins negotiations with your creditors. If they can reach an agreement to pay the debtor the amount that they agreed to pay from that account, and pay the debt settlement firm a fee for its service.

Debt settlement companies offer savings between 20 and 35% after their fees.

They are, however, worth it?

Here’s the short answer: Turn to debt settlement companies only in the last instance. Incorporating a settlement plan could cost you in a variety of ways:

Service charges vary from 18% to 25 percent of the debt you have enrolled that is equivalent to the range of $900 to $1250 on $5,000 of debt. There could also be charges for opening and maintaining an account for savings.

When you stop paying your bills, interest and late fees accrue on your balances. If the debt settlement firm fails to resolve any outstanding debts, you’ll end up being held accountable for the higher balances.

Your credit is harmed, and you may receive debt collections and lawsuits of your lenders.

There could be an issue , as the amount of debt you didn’t pay is generally declared to IRS in the form of income.

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Better option: DIY

Self-help debt settlement businesses claim their expertise in negotiations with creditors, butIf you’re certain that the debt settlement option is the best option — you can try to . It requires confidence that you’re able to work with creditors and have enough money in your bank account to settle the debt the debt, but it can save significant time and money.

Do-it-yourself debt consolidating: Getting a handle on debt by combining several debts into a single one at a lower interest rate could also help save money- as well as your credit. There are multiple options to go about this that include:

Balance transfer credit card: If you qualify for a zero-interest balance transfer credit card is the best way to pay off your debt.

: Look for an interest rate that is lower than the rates you’re paying on your existing credit.

Home equity: Home equity loans and lines of credit have low interest rates, but you’ll put your home at possibility of repossession if aren’t paying as per the agreement.

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I still need expert help

If you require expert advice, consider reaching out to the nonprofit sector . They can assist you to figure out the best approach to get a handle on your debt. They can also assist in setting up a, which is an alternative that is more secure than the services offered by debt settlement firms.

>> COMPARE:

And if, after considering the various options, you choose to hire a company to settle your debts Follow these guidelines:

Check the website , or the to verify whether the business is registered. Companies with good reputations are likely to be registered to ensure their credibility.

Check the . Search for the company within the BBB database to see accreditation information and reviews.

You can ask trusted family members or friends who have used an settlement company.

Authors’ Bios Erin El Issa is an expert on credit cards and a writer for studies at NerdWallet. The work she has written for NerdWallet was featured on USA Today, U.S. News and MarketWatch.

Jackie Zimmerman is a former personal-loans and small-business reporter for NerdWallet. Her work has been featured by USA Today and Money.com.

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