Should I File for Bankruptcy?
Learn how you should file for personal bankruptcy when you can’t afford debt and other relief options won’t help.
Consolidate credit card debt with the help of consumer credit counseling
This is one of the most common misconceptions about debt management programs. You enroll in the program through a consumer credit counseling agency. However, you do not owe the agency anything; they simply help you set up a repayment plan with your creditors. You still owe your original creditors.
Basically, the credit counseling agency acts as a go-between for you and your creditors to arrange repayment. But even through you make payments to the agency, the money gets distributed to your creditors. You can see your balances going down as you progress through the program.
The second biggest misconception about debt management programs is that they get confused with debt settlement. Settlement programs settle your debt for less than you owe; this can damage your credit. By contrast, a debt management program pays back everything you charged. You just do it in a way that’s more cost-effective, thanks to reduced or eliminated interest charges. But even if you pay less interest, you still pay back what you borrowed in-full.
Interest rate negotiation is something you can try and do on your own with each individual creditor. You simply call the customer service number and ask to speak with someone about a rate reduction. You’ll usually have more success if:
Even so, they may only be willing to negotiate down so far. But when you enroll in a debt management program, you get a team of certified credit counselors to negotiate for you. These agencies have established relationships with creditors, so they tend to have more success negotiating. You’re also working with an agency that has a proven record of helping people become debt free, so creditors may be more flexible.
Data shows that people who enroll in these programs see their total monthly payments reduced by up to 30-50%. This can be extremely beneficial, because as your debt increases, so do your minimum payment requirements. At a certain point, you start to juggle bills and put off purchases because you’re spending too much income on credit card debt. A debt management program can help you solve that problem, so you can return to a balanced budget.
Even though you may pay less each month, you can often get out of debt faster with a debt management program. Most people complete the program in about 36 to 60 payments. So, it takes about 3-5 years to eliminate your debt, even if you owe a lot.
The reason this works is because the program reduces or eliminates interest charges. Since more of each payment goes to eliminating principal, you reach zero faster. You basically find a more efficient way to get out of debt.
As we mentioned above, debt management programs are not settlements. That means that you don’t damage your credit score using this solution. In fact, you may see your credit score improve by successfully completing the program. It helps you fix your credit utilization ratio because you eliminate all your debt. It also builds positive payment history. Since those are the two biggest factors used to calculate credit scores, this solution can improve your score.
You seek out a credit counseling agency voluntarily and there’s never any obligation to enroll in the program. In fact, with most agencies you can drop out at any time. You don’t get penalized, but your creditors will restore your previous interest rates. However, any payments made to decrease your balances still apply. So, you won’t be back to square one if you drop out for some reason halfway through.
One of the downsides to a debt management program is that it freezes any credit card accounts you include. So, you can’t use any of the cards you put in the program. It also stops you from applying for new credit cards, although you can still apply for loans.
Although this can be tough, a credit freeze is often a good thing! It helps you break credit dependence, so you don’t rely on credit cards to “get by.”
Some agencies will allow you to leave a credit card out of the program to use for emergencies. It’s recommended to include all your cards, but if you want the safety net, you can keep it. Some agencies will even let you roll the card into your program later, once you get used to living credit-free.
If you’ve tried to negotiate on your own, transfer balances and consolidate with a loan and nothing has worked, try this! A debt management program can work regardless of how bad your credit score is (there’s no minimum credit score requirement) or how much you owe (some agencies will help you, even if you owe more than $100,000). So, if you’ve tried everything else and still want to avoid damage to your credit score, this is probably your best option.