Credit card debt afflicts millions of Brits and, left unchecked, can permanently damage your financial profile. Getting out of debt often starts with consolidating your credit card balances so you’ll have one monthly payment instead of many.
Debt consolidation programs can help you get back on track, but they can be expensive and detrimental if you choose the wrong agency or consolidate for the wrong reasons.
Here are seven things you should know about consolidating debt through an agency.
It’s Third-Party Management
Juggling multiple credit card accounts can be frustrating. With a credit counseling agency, you’ll make a single payment, and the agency will distribute the money to your lenders until the debt is paid off. The agency does not offer loans or settle debts. Instead, they use their relationships with financial institutions to negotiate lower fees and interest rates on your behalf. Therefore, more of your payments will go towards the principle rather than interest charges.
Note: You won’t benefit from consolidation if your lenders do not make concessions.
Payment Plans Are Basically The Same
Repayment plans are the same across various agencies because lenders do not give preferential treatment to any one agency. Your credit counselor will go through your debt and work out your monthly payments to erase debt in 3-5 years. Payments are usually set at 2-3 percent of the total debt, but you might qualify for a lower rate if you’re in the midst of financial hardship.
Most agencies give consumers the flexibility to stop the plan or increase payments to pay off the debt faster.
Credit Counseling
Credit counseling is an important step because it gives the counselor an opportunity to offer solutions after assessing your financial situation. Your debt repayment plan includes an analysis of your budget, including the amount of money you have left after your expenses are deducted. Then you can determine the best course of action for repaying your debt in the fastest possible time.
Consolidation Is Not For Everyone
Debt consolidation may or may not work in your favor. But how do you know? Evaluate your debt: Are your balances all unsecured debt? Debt consolidation is best reserved for unsecured debt, such as credit cards, personal loans, and collection accounts. With your balances identified, your next step would be to work out a repayment plan – make sure you can keep up with payments for the life of the loan. Finally, figure out how much money you’ll have left over after meeting your expenses, paying your debt, and depositing some money into a savings account. If you have money left over, you’re better off managing your debt on your own.
Stable and Consistent Payments
Your payments remain the same for the life of the loan, so you can budget accordingly. When one account is paid in full, the others receive a larger portion of the payment, and it continues that way until all your accounts are paid off.
Account Monitoring
You’ll still receive your monthly credit card statements from your open accounts. Monitor the statements and send them in to reconcile the agency reports with the lenders’ statements.
Consistent monitoring and reporting will ensure that there are no unpleasant surprises – like expecting a debt that’s paid in full and finding out you still owe money.
No More Credit Cards Until The Debt Is Paid In Full
Your contractual agreement will require that you put away your plastic until the debt is paid in full. This requirement is in your own best interest because charging new purchases defeats the purpose of paying off debt.
Keep one account open to use in case of emergency. This emergency card should be a general credit card where you maintain a zero balance. Use the card only in emergencies – an emergency is classified as your boiler going out in the middle of winter, not purchasing a pair of shoes that you don’t need.
Clearly, debt and credit card consolidation might be helpful, but you may be able to achieve the same results on your own. Call up your lenders and request a rate reduction, and quit adding to your debt. Find areas to cut back your expenses and use the savings to pay more on your balances – starting with the highest interest card first.
Finally, make the commitment to live within your means and build a savings to meet unexpected financial emergencies.
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