Card Card and Debt Consolidation FAQ.
Are credit card debt consolidation programs the same as loans that consolidate bills?
No. The debt consolidation programs that are available for credit cards do not involve the customer taking out any type of loan. What it will do is involve the individual working with other companies, either in the non-profit or private marketplace. Together they will come up with a plan to take.
They will normally need to partner with a credit counseling agency and/or debt settlement company. Those individuals or companies will then negotiate directly with your credit card company providers in order to reduce overall payments, the interest rates you need to pay, and also reduce the total balance owed.
In some cases the person doesn’t use a counselor to negotiate but they will decide to do that on their own. However this will tend to be more time consuming. Credit card companies are often willing to work with borrowers. People just need to take the initiative to start this process and ask them.
How can consumers consolidate their unsecured debt?
Debt negotiation and debt settlement – This type of debt reduction involves negotiating the principal balance on the balance that is owed to the lender. While the exact savings will vary based on many factors, in some cases people are able to lower the balance owed by the consumer down by 40 to 60 percent or so. It is among both the most cost effective and the fastest debt reduction options available. The downside is that there will more than likely be a reduction in credit scores. Also, like any solution, there are no guarantees to success.
Credit counseling and debt management – This option for unsecured debt involves negotiating the interest rates charged on the credit cards. It will also involve the creation of a payment plan. An interest rate reduction will in effect save consumers on their monthly bills as more money goes towards paying down the principal balance. Credit counseling plans will usually be in effect for 4 or 5 years.
Credit card balance transfers – This option involves taking the balances of all your credit cards and putting them onto another credit card with a lower interest rate or minimum payment. This is a more traditional approach to consolidation. Be sure to select the best zero interest rate credit cards to transfer your balance to.
Debt consolidation loans – These type of arrangements involve the consumer taking out a loan to help pay off any outstanding debts, bills and credit card balances. If this option is chosen then the interest rate is critical. It needs to be lower then what you are currently paying or the approach to consolidate the various accounts is pointless. Normally this type of loan will also be secured by collateral like your home or vehicle.
Chapter 13 bankruptcy – When someone decides to take this option, it involves paying back your creditors over 5 years or so through a court-approved payment plan. The amount that someone needs to pay each and every month is based on your income. However filing for bankruptcy can greatly reduce your credit scores, so be sure to ask this question to a lawyer or counselor before starting to file.
Medical debt consolidation - While not as common as consolidating credit card debt, it can help pay for the ever increasing health care costs that most people are faced with. It is possible to consolidate your hospital as well as other medical bills, prescription costs and other health care debts. There are programs and methods to use that can help. Learn more.
Is a loan usually a good option for receiving debt relief?
In many more cases than not, yes. In some instances though, a consumer may be better off using credit counseling, debt settlement, or even bankruptcy for debt relief. Some of the considerations are what the persons income is as well as the total amount that they owe their creditors.
In many other cases, people who need debt relief are not eligible for a consolidation loan because of issues such as bad credit, late repayment histories, poor credit scores, total high debt balances, or some other factor which may raise a red flag to a lender. When borrowing money is not an option, find ways to get help with debt consolidation and the best tips.
How do I determine whether a debt consolidation loan is a good debt relief option?
The most important factors are the interest rate, the term, and the conditions of the loan. Also, the borrower needs to be sure they have the financial discipline to make the payments on time. For a debt consolidation loan to make sense for you, the monthly payment, interest, and/or pay back period must be less than staying the current course.
Assuming these factors are all favorable to the consumer who needs help, the most important issues to determine the suitability of a loan is a) the nature of your debt problem b) the type of the loan, c) and the stability of your income and d) how these all impact each other. Find some of the top reasons why to consolidate credit card bills.
Why is the type of the loan important?
One, a secured debt consolidation loan will raise different types of issues for a debtor than an unsecured loan. For example, if a consumer who is looking to borrow even more money from a lender takes out a second mortgage to help consolidate their credit card or other debts, they need to have sufficient income and also “breathing room” because as little as one missed payment can result in the foreclosure of their home. This is why the individuals income is critical.
In addition, the nature of the loan is important because a low payment, high interest unsecured financing product may provide you with short-term relief, but in the long run, it could actually cause the consumer to lose thousands of dollars in fees and/or interest charges.
Why is the nature of the debt problem important?
There have been some studies that showed that over 60% of consumers who go ahead and refinance their property, or who take out a second mortgage to pay off credit card debt and bills end up in the same financial position in about 2 years. Therefore, a debt consolidation loan will usually not make sense if the borrower’s circumstances are the result of either poor budgeting or overspending.
In those cases, any type of loan will only delay the inevitable, which is coming to grips with a serious, maybe uncontrollable spending problem. Be sure to take an honest look at yourself and whether you are disciplined or not to make future payments on time. Individuals who are faced with these situations are better off in speaking to a non-profit credit counseling agency.
Why is income stability important?
The need for this is important for consumers who are considering choosing the secured debt consolidation route because their home could possibly be foreclosed in the event that as little as one payment on the loan is missed. Or if they borrow money in some other way (such as a title loan to consolidate their debt) they could lose their car or have other challenges.
So if a consumers income fluctuates significantly each month or if the person works in an industry / company that is laying off or losing jobs, then these individuals have much more to consider before they ever take out a debt consolidation loan. Borrowing funds in these cases is very high risk.
The consistency and security of income is also very important for unsecured loans too. It is important because if the likelihood for successfully repaying the interest, the balance and the loan is low, the consumer is probably better off addressing the debt through credit counseling or following the settlement process. After all, it is a waste time trying to pay back interest charges and bills that you cannot afford over the long term.
Are they tax-deductible?
It can be. In general, the interest that is paid on debt consolidation loans that are secured by a home is tax deductible. However it is recommend to talk to a professional to ask them this question. Touch base with an accountant or the lender as well for advice. This is one of the main advantages of this type of help. However this may be the only type of loan that can provide a tax break
What are some of the other advantages of using a home-equity debt consolidation loan?
The other advantages include the fact that the monthly payment and the interest rate are typically much lower than what you are paying on a credit card. This has to do because the debt is secured (so the lender is taking on less risk) and the payment term you are responsible for is somewhat longer. Another advantage of this option is that consolidating your debt into one payment will give you more peace of mind, but it also means that you are far less likely to be late on a payment or a bill, which will improve your credit.