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Are Debt Consolidation Companies Worth It?
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Are Debt Consolidation Companies Worth It?
Companies that offer debt consolidation typically sell debt settlement programs that can have a negative impact on your credit score and wallet.
By Erin El Issa Senior Writer Data analysis, personal finance credit card Erin El Issa writes data-driven research on personal finance, credit cards, investments, travel, as well as student loans. She is a fan of numbers and hopes to make data sets understandable to assist people in improving the quality of their lives financially. Prior to becoming the Nerd in 2014, she was an accountant for tax and freelance personal finance writer. Erin’s work has been cited by The New York Times, CNBC and The “Today” programme, Forbes and elsewhere. In her free time, Erin reads voraciously and tries in vain to keep on top of her two children. She is based in Ypsilanti, Michigan.
and Jackie Zimmermann Jackie Zimmerman is a former personal-loans and small-business author for NerdWallet. Her writing has been featured on USA Today and Money.com.
Aug 6 7th, 2021
Written by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years at The Oregonian in Portland in positions such as copy desk chief and team editor and designer. Her previous experience includes news and copy editing at several Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in mass communication and journalism from The University of Iowa.
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If you’re having trouble making repayments on debt, you might be tempted to seek an easy and quick solution. While doing this you’ll probably come across businesses that promote debt consolidation. However, most “debt consolidation firms” actually offer a much more controversial product, which is debt settlement.
For the majority of consumers, it is a risky option. It is best to consider it only after you’ve exhausted alternatives. It’s expensive, and it could severely damage your credit and savings may take years to achieve.
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Debt consolidation Vs. debt settlement
One of the main differences between debt consolidation and debt settlement is who is the one in the deciding role.
Knowing the distinction between the two strategies makes sure you don’t end in a financial loss due to a service or outcome you don’t anticipate.
Debt consolidation is a do-it-yourself strategy that you control. Participating in a debt settlement program puts you in the hands of debt relief companies that may or might not succeed in settling your debt.
Consolidation programs for debt
The companies that claim to be companies that consolidate debt, such as and even offer debt settlement plans that make you stop making payments to your creditors and instead, make monthly payments to an account for savings.
Once there’s enough money in the account, usually after six months the debt settlement firm will begin negotiations with your creditors. If they can reach an agreement to pay the debtor the amount that they agreed to pay out of that account and also pay the debt settlement company a fee for its service.
Debt settlement companies promote savings between 20 and 35% after their charges.
Are they worth it?
Here’s the short answer: Turn to the debt settlement services only as a last resort. Enrolling in a settlement program could cost you in a variety of ways:
The fees for service range from 18% to 25 percent of the debt you have enrolled, which translates into the range of $900 to $1250 on an amount of $5,000 in debt. There can also be fees for opening and maintaining the savings account.
When you stop paying your bills the interest and late fees accrue on your balances. If the debt settlement firm isn’t able to resolve any outstanding debts, you’ll be responsible for these higher balances.
Your credit suffers a hefty hit, and you may receive lawsuits and debt collection of your lenders.
There may be , as the amount of debt that you did not pay is usually declared to IRS for tax purposes as income.
An alternative is to DIY
DIY debt settlement: The settlement companies boast their experience in negotiating with creditors, but — if you’re convinced the debt settlement option is the best option — you can try to . It’s a matter of confidence in your abilities to negotiate with creditors, and having enough money on hand to settle however, you could reduce time and cost.
Do-it yourself debt consolidation: Resolving debt by combining several debts into one with an interest rate that is lower can also save money -and also your credit. There are many options to go about this and include:
Credit card for balance transfer If you’re eligible for a 0% interest charge balance transfer card can be the cheapest method to consolidate the burden of debt.
: Look for rates that are lower than the rates you’re paying on your existing credit.
The Home Equity loans and credit lines have low interest rates, but they also put your house at risk of repossession if you do not pay in the time frame agreed upon.
I still need expert help
If you need expert guidance, consider reaching out to the nonprofit sector . These organizations can help you find the best method to tackle your debt. They can also help set up a , which can be an alternative that is more secure than the services offered by debt settlement companies.
If, after weighing the various options that you have, you decide to work with an organization for debt settlement adhere to these fundamental guidelines:
Check the website , or the, to determine whether the company is registered. The most reliable companies are recognized as having been registered in order to keep their credibility.
Take a look at the . Look up the company’s name within the BBB database to find the accreditation details and reviews.
You can ask for trusted family members or friends who have dealt with the services of a settlement firm.
About the authors: Erin El Issa is an expert in credit cards and studies writer at NerdWallet. Her work has been highlighted by USA Today, U.S. News and MarketWatch.
Jackie Zimmerman is a former small-business and personal-loans writer for NerdWallet. Her work has been featured in USA Today and Money.com.
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