Many people find themselves in the situation of struggling to pay off mortgages and credit cards, while debt piling up. Television commercials, internet advertisements and radio spots for non-profit debt consolidations pop up all over the place. The process sounds too good to be true but for consumers who are struggling to stay afloat, a lifeline to financial freedom is appreciated. While some companies are legitimately out to help, patrons should cautiously wade through the waters of debt relief.
Meeting with a credit counselor
While an organization can say they are a non-profit, this does not necessarily mean it is out to help the public for free. The company will want to meet with you in person or have you fill out a form online disclosing all of your financial information, including Social Security number, so it may run its own credit report. From the credit report, the debt reduction company will be able to assess the amount owed to each credit card, the percentage of your credit limit on each card and your payment history.
Debt consolidation
A debt reduction program typically charges you an upfront fee that can be as high as $2,000. It negotiates a reduction in the total balances that are owed on the credit cards. For example, if your balances add up to $20,000, a debt reduction company will pressure your creditors into accepting $12,000 for the total amounts due. They tell you to not answer the creditor's phone calls for fear you will mess up their negotiations.
Your payments
A credit counselor who specializes in debt consolidation will come up with a monthly payment plan for either three or four years so you can pay off your entire credit card balances. You will make one payment to the non-profit debt reduction program each month. It will take your payment and disburse it to your creditors as per the negotiated plan. Typically, the non-profit will also charge you a $15 monthly maintenance fee for their service. While this sounds attractive, in the long run the amount of interest you pay could be as high as 25 percent of the balance.
Effects of debt consolidation or debt reduction
Both debt consolidation and debt reduction negatively affect your credit report for up to seven years. Your credit score will severely decline, and future attempts at receiving car loans, mortgages, credit cards or apartments will be limited with the negativity on the credit score. Also, you will not be able to use your credit cards once the program takes effect.
Alternatives
While debt consolidation and debt reduction companies seem like a good idea, both of the practices are something the consumer can do without having to pay a third party. Calling your credit card companies and explaining your personal financial situation might lead to a reduction in interest rates or a payment plan directly with the creditors. While they may or may not choose to note this on your credit report, the effect will be less severe if handled directly with them. Also, if you have a sum of money, you may choose to offer the credit card company that amount and see if they are willing to write down your debt. Be persistent with the credit card companies when trying to negotiate a buyout from debt. Record the name of the person who gives you the information and the date and time you spoke.
0 comments:
Post a Comment