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Are Debt Consolidation Companies Worth It?

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Are Debt Consolidation Companies Worth It?

Debt consolidation companies often sell debt settlement programs that can negatively impact your credit score and your wallet.

Written by Erin El Issa Senior Writer Personal finance, data analysis credit card Erin El Issa writes data-driven research on personal finance, credit cards, travel, investing, banking as well as student loans. She is fascinated by numbers and strives to demystify data sets to assist consumers in improving their finances. Before she became an Nerd in 2014, she was an accountant for tax and freelance personal finance writer. Erin’s work has been mentioned by The New York Times, CNBC as well as The “Today” programme, Forbes and elsewhere. In her spare moment, Erin reads voraciously and tries in vain to keep on top of her two children. She is based in Ypsilanti, Michigan.

And Jackie Zimmermann Jackie Zimmerman is a former small-business and personal-loans writer for NerdWallet. Her work has been featured on USA Today and Money.com.

Aug 6, 2021

Editor: Kathy Hinson Lead Assigning Editor Personal finance, 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 positions such as copy desk chief and team leader for design and editing. Previous experience included news and copy editing for many 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 struggling to make payments on your debt, you might be tempted to look for an immediate and simple solution. When you do this you’ll likely come across companies that offer debt consolidation. But the majority of “debt consolidation companies” offer a more controversial product: debt settlement.

For many consumers, it’s the most risky choice. It is best to consider it only after exhausting other options. It’s costly, it can severely damage your credit and any savings could take years to realize.

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Debt consolidation Vs. debt settlement

A key difference between debt consolidation and debt settlement is who’s in the deciding role.

Understanding the differences between these two methods ensures you don’t end with a loss of money due to a service or outcome you aren’t expecting.

Debt consolidation is a do-it-yourself strategy that you control. Incorporating the debt settlement program places you in the hands firms that offer debt relief services, which may or may not successfully settle your debt.

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Debt ‘consolidation’ programs

The companies that claim to be companies for debt consolidation, and , in reality, offer debt settlement plans which will require you to stop paying your bills , and instead make monthly payments into a separate savings account.

Once there’s enough money in that account, typically after six months the company that handles debt settlement begins negotiations to your creditor. If they reach an agreement that you can meet with the creditor, you’ll make the negotiated payment from that account, and pay the debt settlement company the cost of its services.

Debt settlement companies promote savings of between 20% and 35% after their costs.

They are, however, worth it?

Here’s the short answer The answer is to turn to settlement firms for debt only in the last instance. Participating in a settlement program can cost you in multiple ways:

Service fees can range from 18% up to 25 percent of your debt which is roughly the range of $900 to $1250 on an amount of $5,000 in debt. There are also fees for opening and maintaining your savings accounts.

If you don’t pay your bills due to late payments, fees and interest accumulate on your debts. If the debt settlement company fails to settle your debt, you’ll become being held accountable for the higher balances.

Your credit takes a beating, and you may receive legal action and collections of your lenders.

There may be , as the amount of debt you didn’t pay is generally declared to IRS for tax purposes as income.

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An alternative is to DIY

Do-it-yourself debt settlement: Settlement firms tout their expertise at negotiating with creditors, but — if you’re convinced debt settlement is your most effective option, you may try . It requires confidence in your abilities to negotiate with creditors, and having enough money available to settle debts, but you can make significant savings in time and money.

Do-it yourself debt consolidation getting control of debt by combining several debts into one with lower interest rates will also help you save moneyand also your credit. There are a variety of methods to tackle this issue, including:

Credit card for balance transfer If you’re eligible, a 0% interest balance transfer credit card is the most affordable option to pay off the burden of debt.

You should look for rates that are lower than rates that you have on your credit.

Equity in your home: Home equity loans and credit lines have low rates, but you’ll also put your home at risk of repossession if you do not pay in the time frame agreed upon.

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I still need expert help

If you require expert advice you should consider contacting an organization that is non-profit . These organizations can help you figure out the best approach to tackle your debt. They can also help you set up a, which is an alternative that is more secure than the services provided by debt settlement companies.

>> COMPARE:

After evaluating all the alternatives and options, you decide to employ an organization for debt settlement Follow these guidelines:

Visit the to see whether the company is registered. The most reliable companies are registered to ensure their credibility.

Go through the . Look up the company’s name within the BBB database to find accreditation information and reviews.

You can ask trusted family members or friends who have worked with an settlement company.

Authors’ Bios Erin El Issa is a credit cards expert and a writer for studies at NerdWallet. She has had her work featured on USA Today, U.S. News and MarketWatch.

Jackie Zimmerman is a former personal-loans and small-business writer for NerdWallet. Her writing has been featured by USA Today and Money.com.

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