Things you must know about Debt Consolidation
It’s not easy finding yourself entangled in debt. You look for ways to get out of it but somehow you just can’t.
One option to cope with your problem is to seek help from credit counseling agencies which offer debt consolidation programs,
called debt management plans. However, these plans can be unnecessary and, when done through a poorly managed organization,
may even be detrimental. Here are some things that you need to know about consolidating accounts through an agency:
1.
Credit counseling agencies operate through a third-party system.
The agency streamlines everything you need to pay for. You only have to make one payment to the credit counseling agency
and they distribute the money to your creditors until they are paid in full. These agencies have preset arrangements with
most financial institutions – many of which have low interest rates and fees so more of your payment actually goes toward
the balance rather than finance charges.
2.
Not all agencies are created equal.
With something as precious as your finances, be extra careful about who you work with. Look for a nonprofit
credit counseling organization that belongs to either the National Foundation for Credit Counseling (NFCC) or the
Association of Independent Consumer Credit Counseling Agencies (AICCCA). These organizations ensure that member
agencies pass rigorous standards set forth by the Council on Accreditation for Children and Family Services Inc.,
or another approved third party. They also make sure that their counselors pass a comprehensive certification program.
But even if they are members of such organizations, exercise caution and be very picky. Make sure that the agency is
organized, sends payments and statements on time and offers strong consumer education and support.
3.
All plans are the same.
All
debt management plans are structured in the same way and the only thing that differs are the agencies and employees.
Your counselor determines how much it will take to pay your creditors in full in three to five years and the payment is
usually around 2.5% of the total debt, which gives enough wiggle room. NFCC spokeswoman Gail Cunningham says the organization
has negotiated with the top 10 credit issuers to reduce the minimum monthly payment to as low as 1.75%, while also cutting
interest rates to meet the 60-month maximum repayment time frame. You can stop the plan at any time, and you can also
pay more -- and get out of debt faster -- when you have extra funds.
4.
Counseling before consolidation.
Now that you have chosen the agency, a counseling session is in order. These appointments are important as
you and your counselor assess your financial situation and map out payment strategies such as how long it’s
going to take and how you can still pay for basic expenses. If you have enough cash left over after subtracting
expenses from income, consolidation will then be presented along with other options.
5.
Payment is constant.
While you’re on the plan, your payment remains constant. No more figuring out how much you should be paying
each month as the same amount will be given to your creditors until everything is paid for. When one account
is already satisfied, the others will then receive a larger portion of your payment which speeds up the repayment process.
6.
Keep your card in a safe place.
No more charging until you've paid off all your debts. One of the agreements you make when consolidating your
debts with an agency is that you will close the accounts and not get any new ones until you are debt-free.
But it completely makes sense. Because if you’re still charging while repaying, things might get out of hand and your debt might grow.
7.
Consolidation is not for everyone.
So how do you know if debt consolidation would work in your favor? First, the bulk of your balances
should be in unsecured debts, such as credit and charge cards, personal loans and, sometimes, collection accounts.
If most of your liabilities include other types (tax debt, child support arrearage, old parking tickets, for instance),
these plans won't help. Second, you should be confident that you can pay not just for a month or two, but for years.
And third, you need to have just enough money for essential expenses, some savings and your debt. If you have too much
cash left over, you're better off managing the accounts on your own.
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