1. It's a third-party payment system.
Tired of juggling many different accounts? With a debt management plan,
you make one payment to the credit counseling agency, which distributes
the money to your creditors until they are paid in full. These agencies
do not make loans, nor do they settle debts. Instead, they have preset
arrangements with most financial institutions, many of which lower interest rates
and fees, so more of your payment goes toward the balance rather than
finance charges. However, if you just happen to have accounts with
creditors that don't offer any concessions, that benefit is reduced.
2. Agencies range in quality. With
something as precious as your finances, be exceedingly 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 Financial Counseling Association of America (FCAA). They
ensure member agencies pass rigorous standards set forth by the Council
on Accreditation or another approved third party, and that their
counselors pass a comprehensive certification program. Even if they are
members of such organizations, though, be picky. The agency should be
organized, send payments and statements on time and offer strong
consumer education and support. If it falls short, contact another
branch.
3. All plans are basically the same.
Financial institutions don't give preferential treatment to any one
organization, nonprofit or otherwise. So while the agencies and
employees vary, the plans are all structured the same way: Your
counselor determines how much it will take to pay your creditors in full
in three to five years. The payment is usually around 2.5 percent of
the total debt, though in hardship situations,
there is some wiggle room. 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. Before consolidation, counseling.
Why consolidate bills if you can't pay for basic expenses or if there
are better alternatives? You wouldn't, which is the reason consolidation
begins with a counseling appointment where your entire financial
situation is assessed. If you have enough cash left over after
subtracting expenses from income, consolidation will be presented along
with other options. When a counselor is knowledgeable and compassionate,
these sessions can be enlightening and motivating. Not all are. If he
or she acts bored, judgmental or pushy, request a different counselor.
5. Consolidation is not right for everyone. 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, unpaid child support or 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.
6. It's simple, steady and efficient. While
you're on the plan, your payment remains constant. You never have to
wonder how much you should be paying each month, as it will be the same
amount until all creditors are satisfied. When one account is satisfied,
the others receive a larger portion of your payment, which speeds up
the repayment process. Consolidation can also provide welcome respite
from creditors calling about overdue accounts, as they generally stop
when the plan begins.
7. You still have work to do.
Those you owe will still be sending you account statements, which
you'll have to monitor and send in. Agency reports do not reflect the
interest that you're still being charged, so if you don't submit them,
the balance the agency reports will be wildly different from what your
bank statements say. Many clients get a rude awakening when they think
they're all paid off, only to find they still are in the hole for
thousands.
8. No more charging until you're done.
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. This can be a mighty difficult adjustment if
you're used to whipping out the plastic on a daily basis. However, it
does make sense. After all, if you are still charging while repaying,
you're spinning your wheels. In case of emergency, you're allowed to
leave one card, which is typically a general purpose account with a low
or no balance that you can use anywhere.
9. Consolidation is not bankruptcy, but lenders may perceived it negatively.
By consolidating, you're paying 100 percent of your obligations, which
is quite different from discharging them in a bankruptcy or settling the
debt. Still, your credit report
can take a hit if your monthly payments are less than what you would
normally pay. Also, while consolidation is not factored into a credit score,
some creditors notate that you're paying through a third party, which
can be a red flag to a lender or anyone else looking at the report. "We
look at it as a bankruptcy. It shows that they need help paying their
bills," says Stuart Davis, a senior loan consultant for Princeton
Capital out of Los Gatos, California. According to their underwriters,
the plan needs to be complete before they will make a loan. On the other
hand, most people who consolidate do so because they're already
stumbling and missing payments, so making timely and consistent payments
through the service can help their reports.
Clearly, consolidating debts through a credit counseling agency can be
helpful, but you may also be able to achieve the same results on your
own. How? Suspend charging and request rate reductions from each of your
creditors. If they turn you down, make a few larger than average
payments and try again. Then, review your budget to know exactly the
amount you can afford to send every month. Plug the numbers into a good debt repayment calculator
to know how long it will take to become debt free. Pay more to the
accounts with the highest interest rate, and when one is paid off, add
the payment the next most expensive debt. Finally, commit to living
within your means and prepare for life's inevitable financial
emergencies.
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