The average American family has 10 credit cards and over $15,000 of credit card debt. Nearly half of these households have trouble making the minimum monthly payments, and some are using plastic to cover daily living expenses such as groceries, gasoline, and the morning latte. Late fees and over-the-limit fees are rising, and more and more households are missing one or more payments altogether.
If you are having debt problems, now is the time to stop this destructive cycle and get the help you need from a debt relief program. This article teaches you the principles of bill consolidation, one of the most popular forms of debt reduction.
What is bill consolidation?
Bill consolidation–also known as interest-rate arbitration or credit card consolidation–takes your high-interest loans and credit cards and consolidates them into one, low-interest loan that you can afford. In other words, you’re taking out one loan to pay off many others. You make one monthly payment to a debt consolidator who distributes the funds to your creditors until they are paid in full. Only unsecured debt–credit cards, medical bills, and personal loans–can be consolidated. You cannot consolidate mortgages, rent, utilities, cell phone and cable bills, insurance premiums, car loans, student loans, alimony, child support, taxes, or criminal fines.
There are two kinds of bill consolidation: non-profit and for-profit. Both types work with your creditors to work out modified payment plans. Contrary to the popular notion, non-profit companies charge a nominal fee for their services. If a bill consolidation company is for-profit, you must also pay an upfront service charge of about 15% of your debt’s face value. For example, if the total amount owed to creditors is $15,000, you can expect to pay a fee of around $2,250.
If you are considering bill consolidation, here is what you need to know first:
1. Bill consolidation will not solve your careless spending and savings habits. The only way that you will ever achieve lasting financial freedom is to apply the dynamic laws of financial recovery to your everyday life. These smart-money principles will help you to establish spending and savings habits that are built on solid bedrock. They are discussed in a separate article entitled “The Dynamic Laws of of a Complete Financial Makeover.”
2. You might not qualify for a bill consolidation loan because of delinquent credit history. In such cases, you might want to look into other debt relief options such as debt settlement. Bankruptcy protection, however, must be considered only as a last resort.
3. If your unsecured debt is less than $10,000, bill consolidation is probably a better option than debt settlement. Here is why: Most debt settlement companies require that you have $10,000 or more in unsecured debt to qualify for their services.
4. Because most bill consolidation loans are unsecured, the lender can’t lay claim to your home if you are unable to keep up with the payments. However, late or missed payments will adversely affect your credit score.
5. If a bill consolidation loan is secured and you miss payments, the lender can lay claim to your home or other asset.
6. There is no public record that you have ever consolidated your debts.
7. Bill consolidation should not be confused with debt settlement, another form of debt reduction. With debt settlement, negotiators communicate with creditors on your behalf to settle you debts to reduced and agreed-to amounts. Once you enroll in a debt settlement program, your negotiation team opens a trust account for you. You must deposit up to 50% of your debt’s face value into the account over a period of 24-60 months. This money is used to settle your debts with creditors.
8. As we mentioned above, you can only consolidate unsecured debt such as credit cards or personal loans. You cannot consolidate mortgages, rent, utility bills, cell phone and cable charges, insurance premiums, car and student loans, alimony, child support, taxes, or criminal fines.
9. Bill consolidation could hurt your credit scores over the short term. For example, applying for a bill consolidation loan from a bank or credit union requires a “hard credit check,” which might affect your scores a small amount. More importantly, you must be aware of how a bill consolidation loan might affect your “credit utilization ratio.”
According to Credit.com: “Credit utilization refers to the percent of your available credit that you’re currently using. For example, if the credit limit on all your credit cards combined is $30,000 and you have $15,000 in credit card debt then your credit utilization is at 50%. But if you get a bill consolidation loan and close all your credit card accounts, your total debt will still be $15,000 but your credit utilization will now be 100%, which may hurt your credit score.”
Detweiler adds: Over the long term, “a bill consolidation loan shouldn’t hurt your credit score. You may see a dip temporarily since you have a new account. But if you pay it on time, that should even out. If you close all the credit cards you’ve consolidated you may see your scores drop – though for some that may be safer than running the risk of charging on those cards and getting deeper in debt!”
10. Never let a bill consolidation company pressure you into joining their program.
11. Don’t hire a company that has no interest in your specific financial needs.
12. Before you enroll in a bill consolidation program, review your budget carefully and make sure that you can afford the monthly payments. Don’t be surprised if you have to eliminate certain nonessential expenses.
13. Before you join a bill consolidation program, type in the company’s name followed by the word “complaints” into a search engine. Learn what others have said about the company and whether the firm has ever engaged in any unfair business practices.
14. Find out if the company is a member of the Online Business Bureau as well as their local BBB. Check their ratings with both bureaus and whether any complaints have ever been made about their services.
15. Contact all of your creditors and find out if they are willing to work with a particular company.
16. Never pay a debt consolidator until all of your creditors have approved your modified payment plan.
17. Once you begin to pay the debt consolidator, contact all of your creditors and find out if they are receiving the monthly payments.
18. No matter what, make your monthly payments to the debt consolidator on time.
19. A bill consolidation company cannot represent you in court unless it is also a law firm.
20. A bill consolidation company cannot prevent the foreclosure of your home or the repossession of your car.
Let’s apply bill consolidation to a typical financial situation:
Suppose you have $20,000 of credit card debt with an average APR of 23%. Assuming that you make no additional purchases or cash advances, it will take you 145 months to get out of debt if you only make the minimum monthly payments. You will pay $38,085 in interest and a grand total of $58,085 (principal + interest).
By using bill consolidation, the amount of interest that you will pay is reduced. If you choose a for-profit company, you will also pay an upfront service fee of about 15% of your debt’s face value.
Using the example above, let’s say that you choose a for-profit company to consolidate your $20,000 credit card balance. A consolidator negotiates an average APR of 15% with your creditors and a fixed monthly payment of $402. You must also pay a $3,000 service charge–15% of your debt’s face value–to the consolidation firm.
If you make a fixed monthly payment of $402, it will take you 77 months to become debt free. You will pay $10,823 in interest and a grand total $30,823 (principal + interest).
Let’s compare your total payments by using bill consolidation and by only paying the minimum amount due each month.
Here are your total payments by using bill consolidation:
$20,000 – Original debt
$10,823 – Interest paid
$3,000 – Upfront service fee
$33,823 – Total payments
Here are your total payments by only paying the minimum amount due each month:
$20,000 – Original debt
$38,085 – Interest paid
$58,085 – Total payments
By using bill consolidation, your net savings is $24,262 and you become debt free 68 months sooner than by making the minimum monthly payments.
This article has taught you the principles of bill consolidation, one of the most popular forms of debt relief. Although a bill consolidation program can help you to reduce your debt, it does not teach you how to live fiscally fit. The only way that you will ever achieve lasting financial freedom is to apply the dynamic laws of financial recovery to your everyday life. These smart-money principles will help you to establish spending and savings habits that are built on solid bedrock. They are discussed in a separate article entitled “The Dynamic Laws of a Complete Financial Makeover.”