debt consolidation/credit question

Factual Questions
1

ok, so my, um, freind, has an a*sload of credit card debt. so he decides get one of those ameridebt deals where they negotiate with you creditors yadda yadda yadda.

they say that it won’t hurt your credit, but I just don’t see how that’ the case.

if visa is anticipating $2,000 @ %20 interest - why would they be just as happy with $2000 and no interest? Why wouldn’t they report him to equifax or never extend him a line of credit again?

I guess the OP would be: do debt consolidation deals help you get out of debt with no harm to your credit, or do they just help you get out of debt?

2

Most debt consolidation deals I know of involve the consolidator supplying a loan large enough to pay off all other debts, effectively buying out the loan and replacing it with what is claimed to be a single payment at a lower rate of interest.

Is this a different scheme?

3

It might hurt, but it’ll hurt less than if he defaulted or had severe credit deliquencies.

The best thing is to pay on time. The worst is to default.
If he can negotiate new pay schedules to prevent defaulting on loans and cards, then he is better off.

You should always work with your creditors. It is usually better.

Lacking alot of detail, as a local credit expert, it is a good idea to keep in touch with your creditors and make arrangements. It won’t polish a credit report clean, but it will prevent it from becoming a disaster.

Debt consolidation is where you take out a decent rate loan and they ensure that the laon is distributed to your current lenders. Again, debt consolidation (lacking details) is usually a good idea since you are getting high interest rates paid off with a more manageable payment of a straight loan rather than revolving credit card debt that lets you get by on min payments.

4

BTW - many debt management programs are funded by big credit card companies and target consumers who are high bankruptcy risks.

Rather than have consumer go into bankruptcy and pay little or nothing, big credit card companies pull you into debt management programs…thus lowering the number of bankruptcies and recovering some $$$

5

I believe so - the credit cards aren’t paid off, the debt-consol people negotiate (much) lower interest rates w/the creditors and you send them (the debt-consol people) a check and the disburse the funds accordingly. A benevolent middle-man, if you will.

6

sorry, my last post was re Crusoe. and I’m also sorry about ending a sentence with an adverb.

7

Interesting. I’d never heard about that kind of debt management. Sorry I can’t help more.

8

In regards to the OP, once you pay back the $2000, Visa can’t touch you. They are not entitled to the interest, just the principle.

9

Really? Should you make payments totalling $2000, how do you establish that they were all payments on principal?

10

Been there, done that, don’t want the T-shirt. :confused:

As has been mentioned upthread, a debt-consolidation loan buys out several high-interest debts with a single debt with a hopefully lower interest rate and monthly payment.

The next step, if needed, is “credit counselling”, in which a counsellor receives money from you, takes over the payments to the creditors, handles all contacts with the creditors to get them off your back, and may negotiate lower payments. In my area (Ontario province, Canada), this was handled by a branch of a social service agency affiliated with the regional government.

Ontario Associaltion of Credit Counselling Services

The next step, if needed, is a “Consumer Proposal”. This is a formal legal document offering to pay back part or all of the debt. In Ontario, the proposal is presented to the creditors, who have a certain amount of time to respond. If they do not respond, the proposal is considered to be accepted. Here you make a payment, but the rest of your affairs and assets remain in your hands.
Beyond this lies formal bankruptcy. This too is a legal procedure, but it has far greater restrictions and implications. Essentially a trustee takes over all of your financial affairs. All of your income and assets go to the trustee for debt repayment except those that you need for survival.

Both the consumer proposal and the bankruptcy are handled by bankruptcy trustees.

As for the OP re credit rating, I was told that, by the time you need these services, your credit rating is already about as bad as it can get, so it doesn’t make a difference from that viewpoint. More important is getting things under control: in other words, survival.

I seem to remember from my credit-card agreements that payments to the cards went to interest first. Each month was treated as a loan, and you paid the interest on that loan, then any additional funds went to reducing the principal.

11

I should have clarified. There should never be a problem with paying off you balance early. If there is, I would think that it was one of those “second chance” cards and you already had credit probs to begin with.

To restate: if you are carrying a balance of $2000, and you pay said balance in one lump sum, that is all the credit card people are entitled to. they should not be able to do anything to your credit for interest that you would have paid if you had dragged out the balance. It is my understanding that the debt consolidators pay off you balances, thus buying your debt. Then you pay them back with a lower interest rate.

Please don’t flame me if I am wrong. I am far from an expert.

12

Holy flurking schnitt!

Is that the norm? Or am I just incredibly lucky to have a 9% Master Card and 13% Visa?

13

Poor credit risks get higher rate interest cards and loans.

14

I was deep in credit card debt because I liked living at a level I couldn’t afford. I was making the minimum pay,ments but the intrest was killing me. I signed up for a program from Debtfree where they took x amout out of my checking account and sent it to the credit card companies. Under this program the intrest rates dropped from the 15 and 21% I was paying to 4-6 % and one card (Discover) dropped to zero. It still would have taken me four years to pay off the cards at that rate, but I received a lump sum payment when I was laid off and we were abble to use that to pay off all the cards (the credit card companies took less than the full debt) Yes both affected my credit rating, but 8 months later I was able to get an unsecured credit card with a 15% intrest rate that has a low enough limiot that I can’t get into too much trouble