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(image: https://kingged.com/wp-content/uploads/2019/02/instant-payday-loans.jpg)Are Debt Consolidation Companies Worth It?
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Are Debt Consolidation Companies Worth It?
Debt consolidation firms typically offer programs to settle debts, which can have a negative effect on your finances and credit score.
by Erin El Issa Senior Writer Personal finance, analysis of data credit card Erin El Issa writes data-driven research on personal financial matters, credit cards, investments, travel, and student loans. She is a fan of numbers and hopes to make data sets understandable to assist people in improving their financial lives. Before becoming the Nerd at the beginning of 2014, Erin worked as an accountant for tax and freelance personal financial writer. Erin's work has been mentioned in The New York Times, CNBC, on the "Today" programme, Forbes and elsewhere. In her free moment, Erin reads voraciously and tries in vain to keep on top of 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.
Updated August 6, 2021
Written by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years working at The Oregonian in Portland in roles including copy desk chief and team director of design and editing. Prior experience includes copy and news editing for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communication and journalism from the University of Iowa.
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If you're having trouble making the payments to your credit card, you might be tempted to look for an easy and quick solution. While doing this, you'll likely run across companies that offer debt consolidation. But the majority of "debt consolidation firms" actually sell a more controversial product called debt settlement.
For many consumers, is a risky choice. It should be considered only after you've exhausted all alternatives. It's costly, it can severely damage your credit and savings may 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 the one in charge.
Knowing the distinction between the two approaches ensures that you don't lose money or obtaining an outcome that you don't anticipate.
It is a DIY method that you can control. Enrolling in an agreement to settle your debt puts your finances in the hands of debt relief firms who might or may not be able to successfully pay off your debt.
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Debt 'consolidation' programs
The companies that claim to be companies that consolidate debt, and , in reality, offer debt settlement plans that require you to stop paying your bills , and instead pay your monthly bills into an additional savings account.
Once there's enough money in that account, typically after six months, the debt settlement company begins negotiations to your creditor. If they reach an agreement, you'll pay the creditor the amount that they agreed to pay from the account and also pay the debt settlement company a fee for its service.
Debt settlement companies promote savings of between 20% and 35% after fees.
So, are they worth it?
This is the quick answer You should consider debt settlement firms only in the last instance. Enrolling in a settlement program could cost you in a variety of ways:
Service charges vary from 18% to 25% of your enrolled debt, which translates into the range of $900 to $1250 on the amount of debt you owe. There can also be fees to open and maintain the savings account.
If you don't pay your bills, interest and late fees accrue on your balances. If the company that you contracted with to settle your debt does not resolve your debt, you'll become with these debts.
Your credit is harmed, and you may receive lawsuits and debt collection from your creditors.
It could be, since the amount of debt you didn't pay is generally reported to the IRS as income.
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Better option: DIY
Self-help debt settlement businesses tout their expertise at negotiating with creditors, however -when you're sure that debt settlement is your best option -- you could try . It requires confidence in your ability to work with creditors and have enough money available to settle debts the debt, but it can make significant savings in time and money.
Do-it yourself debt consolidation: Resolving debt by combining several debts into one at an lower interest rate could also save money -- and your credit. There are multiple options to go about this, including:
Credit card balance transfer If you are eligible for a zero-interest account credit is your cheapest way to consolidate debt.
: Look for rates that are less expensive than rates on your existing credit.
Home equity: Home equity loans and lines of credit are low-cost, however you'll also 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 you should consider contacting a nonprofit . These organizations can assist you determine the best way to get a handle on your debt. They can also assist you in setting up a , which can be an alternative that is more secure than the solutions offered by debt settlement firms.
>> COMPARE:
And if, after considering all options that you have, you decide to work with an organization for debt settlement Follow these guidelines:
Consult the , or the, to determine whether the business is registered. Reputable companies will likely be registered to maintain credibility.
Go through the . Look up the company's name on the BBB database to see reviews and accreditation information.
Ask for trusted family members or friends who have used an settlement company.
Authors' Bios Erin El Issa is a credit cards expert and a writer for studies at NerdWallet. The work she has written for NerdWallet was featured in USA Today, U.S. News and MarketWatch.
Jackie Zimmerman is a former personal-loans and small-business reporter for NerdWallet. Her writing has been highlighted in USA Today and Money.com.
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