Has anyone used these things? How do they work? I mean if I have 5 credit cards that I paying on, how does consolidating them into 1 payment help me or companies?
It helps the CC companies because they get paid off. You now just pay the consolidator at a presumably lower interest rate than the CC companies so it will save you money.
My guess is that the consolidator ends up negotiating a settlement with the CC companies for less than you owe and makes money on both ends of the deal.
But what happens to your credit rating?
The theory, of course, is that you pay of your credit cards - and then do not run them back up again. Otherwise you just have a bigger debt problem.
The advertised benefits are mainly two: That the interest rates on a consolidation loan are lower than on CC debt, so you save money taking out a consolidation loan to pay off the CC; and administrative convenience, since now you have only one creditor to deal with and one loan to monitor, rather than many.
The first of these benefits is not implausible, and can be a real money saver, considering how excessive interest rates on CC debt are. The second benefit is, in my view, in itself not enough to justify the consolidation (but disclaimer: I’ve never used debt consolidation, and I don’t intend to ever do it.)
I’m not sure the consolidator can, behind your back, negotiate a partial waiver of the existing debt with creditors. That can certainly be done, and there are “financial advisors” specialising in this, but I would think it requires an explicit mandate from the debtor (also because it can wreck your credit score).
I’m in one right now, because over the past few years I managed to rack up an unsustainable amount of debt due to a number of reasons (in particular a week-long hospitalization and spending way more than I could afford to try to save a sick cat) and I realized I wasn’t going to be able to pay my way out of it on my own.
The company (which is a non-profit, one of the reasons I went with them) reached out to my various creditors and negotiated a monthly payment with a much lower interest rate than I was paying before, closed the accounts, and now they automatically withdraw a fixed amount from my checking account once a month and disperse it to said creditors. My monthly payment is about half of what I was paying before, and as long as I keep up with the payments I should be debt-free by 2028.
My credit score dropped by about 150 points when I joined the program, but with my finances being as they are I don’t anticipate trying to take out any significant new debt in the next few years anyway.
so did you have to close out your CC? thanks for advice
The debt consolidation company closed my credit card accounts for me after I signed the deal.
I worked for debt consolidation charity (in the UK) in the late Nineties. It was partly funded by large banks, presumably on the basis that they would eventually recoup the debt - though they would usually freeze interest on the debts as part of the repayment arrangement. I seem to remember that debtors on our payment plans would inevitably take some knock to their credit rating - a ‘default notice’ would be issued when the debt was passed to its respective collection department. But with any luck a ‘County Court Judgement’ could be avoided. That said, sometimes the best course of action for the debtor was voluntary bankruptcy.
The answer is no for most debt consolidation loans.
If you go to a place like “Lending Tree”, and put in some basic information, you can expect a series of small lenders to reach out to you with offers of a “personal loan.”
As noted, it is usually at a lower rate than your credit cards, and they’ll want to set up the repayment as an automatic debit from your checking account, making it easy to repay.
They’ll then send a payoff to your credit cards, to pay them down to zero. But you’ll still have access to those cards.
You can also borrow money this way for other needs, like car repairs. It’s an unsecured loan, and fairly easy to get.
Depends on the Consolidation service. Some do, some don’t.
It’s often a good idea, because it prevents you from going out and overspending (like you did before, that got you into this situation).
You could get a new credit card, but the consolidation service will encourage you to only use it for convenience – always pay the full balance every month. That, plus paying regularly on you old ones, will start building your credit score back up.
But be careful in finding a Consolidation Service – this field is rife with scams! Look for one from a non-profit organization (make sure it really is a non-profit, licensed with the state). And watch out if their promises seem too good to be real. But this is a good way to go in reducing debt burdens.
If you pay off a credit card, you can always just put it aside and not use it, while still keeping it open. That’s better for your credit than closing the card.
There are also ( in the US at least) 0% balance transfer credit cards. Typically you open it and get 15-21 months 0% interest on what you transfer over and for new purchases.
Be careful, if you haven’t solved the issue that got you into debt and still have outgoing and repayments exceeding income or cannot pay the full balance in the allotted time then these just end up with possibly higher interest on even more money.
If you can pay the total back in the 15-18 months and won’t rack up more unrepaid spending then getting rid of the interest can be really helpful for sure and it probably helps you credit rating as you now have more credit , that’s of course assuming you keep the other cards open but don’t use them.
I’ve utilized balance transfer offers, usually taking advantage of a low transfer fee the best these days is 3%of the balance transferred which is tacked on to the amount you’re transferring. So the cc gets some $$ up front but usually that’s a lot less overall than a monthly interest charge on a large balance.
Ntl it’s kick the can down the road, and unless one is aggressively tackling that cc balance 18 months later you’ll be looking for another balance transfer offer.
But I suppose only customers with a good credit score would get the low transfer fees. And each transfer you do hurts your credit score, so next time you’ll pay a higher fee.
In the end, the CC companies will always get their money - unless your score is so bad they sell your debt to a collector at, say, 40 cents on the dollar, for the collector to get as much out of you as they can. But by the time this happens, accumulated interest mean those 40 cents on the dollar are still not so bad.