Work With A Nonprofit Credit Counseling Organization
can review your entire financial situation and work with you to create a plan to tackle your financial challenges. They give advice about credit issues, budgeting, money management and debt management.
If you work with a credit counselor, its important to research the organization before you get started. Check with your state attorney generals office and consumer protection agency to ensure its reputable.
Pros: A credit counseling organization may work with your to set up a debt-management plan on your behalf, which requires you to make a single monthly payment to the credit counseling organization each month. The organization then uses the money you provide to pay your creditors. Your credit counselor may also work with your creditors to negotiate lower interest rates or waive certain fees.
Cons: Some credit counselors may charge a fee for some of their services, and you may have to agree not to apply for new credit or use your existing credit if you participate in a debt-management plan.
Consolidating Credit Card Debt Through A Debt Management Program
If you cant consolidate credit card debt on your owneither because you have a low credit score or too much debt for a DIY solutionthen you need to call in professionals.
Not sure which consolidation option is right for you? Talk to a certified credit counselor for a free, no-obligation debt evaluation.
Being Debt Free Vs Your Credit Score
When its all said and done, being debt free is one of, if not the best thing you can do for yourself and your future. If you are currently carrying a lot of credit card debt and want to pay it down once and for all but are afraid of how that will affect your credit score, answer this question. Is a high credit score really more important than being debt free?
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Best For Those With High Credit Scores Who Can Repay Their Debt Within 1
A balance transfer credit card consolidates your existing credit card debt onto one card with one main benefit — a low introductory interest rate. Most will offer a 0% introductory APR on balance transfers for between 12 – 24 months, allowing you a longer timeline to pay down your debt without worrying about interest. Balance transfer cards often charge a fee for each balanced transferred — typically between 3% to 5% — which can really add up when transferring large balances.
Apply For A Personal Loan
A personal loan can be used to consolidate debt, and the funds from a debt-consolidation loan can be used to pay off your credit card balances. So instead of making multiple credit card payments each month, you make one payment for the personal loan.
Pros: If you have good credit, you may qualify for a lower interest rate on a personal loan than the rates your credit card issuers are charging. Personal loans offer flexible repayment terms, so you can select the one thats right for your budget. Plus, some lenders will send payment directly to your creditors, so you wont be tempted to use the loan funds for something else. And many lenders offer the option of applying for prequalification, so you can shop around to see what your potential options are without affecting your credit scores.
Cons: You need to meet the lenders eligibility requirements to qualify for a personal loan. If youve had financial difficulties in the past, you may not be eligible, or you may only qualify for an interest rate thats comparable to the current rate on your credit cards. In addition, some lenders charge an origination fee, which could add hundreds of dollars to the cost of your loan, which could eat into your loan funds before you even receive them.
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Do I Need A Loan To Consolidate My Debt
When consolidating credit card debt, there is no need to take out a loan. A debt management program eliminates debt in 3-to-5 years, without the obligation to enter into a loan agreement.
Credit counseling agencies that offer nonprofit debt consolidation have working agreements with credit card companies to reduce the interest rate on your debt to somewhere near 8% and arrive at an affordable monthly payment.
Consumers make the fixed monthly payment to the agency, which distributes the money to the card companies in agreed upon amounts.
If you miss a payment or leave the program early, the only penalty is to revoke whatever concessions were made on your interest rate.
Where Payoff Falls Short
Moderate funding time: If same or next-day funding for a debt consolidation loan is a priority, there are other lenders to consider. However, Payoffs two-day funding time is still decent compared to some competitors.
May charge origination fee: Payoff may charge an origination fee up to 5%. This fee is taken from the total loan amount when the loan is issued. Though this is the only fee Payoff charges, some lenders charge zero fees, including origination fees.
No rate discount for autopay: Unlike other lenders, Payoff does not offer a rate discount for setting up autopayments. This discount usually ranges from 0.25 to 0.5 percentage points and can reduce the overall cost of your loan.
No co-signed, joint or secured loan options: Payoff only offers unsecured debt consolidation loans, meaning theres no option for borrowers to submit a joint application, add a co-signer or secure the loan with collateral to qualify for a better rate or a larger loan.
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Consider Your 401 Savings
Similar to taking out a home equity loan, dipping into your 401 savings is a high-risk option for credit card debt consolidation. Its important to recognize that taking out a 401 loan before you reach the eligible age of 59.5 will result in early withdrawal penalty fees, reduce your retirement fund and potential additional fees if the money isnt repaid on time.
With that in mind, 401 loans can be an option for consolidating credit card debt, if all other options have been exhausted. This tactic provides lower interest rates than other unsecured loans, plus the action will not show up on your credit report or affect your score.
Dont forget: Your 401 is connected to your employer, so if you lose or leave your current job, youll have to pay back the loan by Tax Day of the next year. If your employment situation doesnt change, 401 loans are typically due in 5 years.
Where To Go For Help If You Need It
You may need help from a professional agency if you cant qualify for traditional options because you have poor credit or few assets. Getting advice from a nonprofit can help you sort through your options and chart the best course of action.
While you may see debt settlement companies advertised as a debt solution, working with these types of companies is a less desirable option because they often charge fees and use methods that harm your credit scores. You can negotiate a settlement with the credit card company on your own, without paying fees to a third-party company.
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Know What You Want And How To Find It
Before reaching out to a credit counseling agency, write out your financial problems and goals and identify the most important ones.
All certified credit counselors can help you with simple budgeting, and that type of general advice is free. But you may require one with specialized training if you have a specific goal, such as homebuyer education, debt management, bankruptcy counseling or managing student loans, and those services carry fees.
There are two key resources for finding credit counselors:
The National Foundation for Credit Counseling is the nations largest nonprofit financial counseling organization. It offers a localized search tool that can help you find an affiliated agency nearby with specialists who are right for your financial situation. You also can call 800-388-2227 to be automatically connected to the NFCC member agency closest to you.
The U.S. Department of Justice has its own search tool to help consumers find a credit counseling agency. This list is limited to agencies that provide bankruptcy counseling, but many provide other services as well, and all are vetted by the federal government.
Many credit counseling services are available over the phone, making it easy to get financial advice even if there isnt a credit counseling agency in your area.
Look Into Strategies To Pay Off Credit Card Debt
With the debt snowball method, you target the card with the lowest balance and make extra payments toward that account, while paying just the minimum on all other cards. Once you’ve paid off that balance, move on to the next-lowest balance and add what you were paying on the first card to pay it off even fasterhence the “snowball” effect. You’ll continue this practice until you’ve paid off all of your credit card balances.
The debt avalanche method works similarly to the debt snowball method. The only difference is that you’ll focus on the cards with the highest interest rates first instead of the lowest balances.
The debt snowball method may be a better option if you’re struggling to get motivated to pay off your debt. Paying off small balances quickly can give you small wins early, making it easier to build momentum. The debt avalanche method, on the other hand, can save you more money because you’re getting rid of debts with higher interest first.
Depending on your debt situation, though, the difference in savings may not be large. Use a debt snowball calculator to determine which is the better option for you.
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Home Equity Loan Or Heloc
How it works
With a home equity loan, you borrow against the value youve built up on your home. Your home equity is the difference between how much you owe on your mortgage and how much your home is worth. A home equity loan is typically a lump sum loan that you pay back at a fixed interest rate.
A home equity line of credit allows you to make multiple draws over a period of time, and is usually paid back at an adjustable rate.
Pros of a home equity loan for debt consolidation
- Low interest rates. As a secured loan, home equity loans and HELOCs tend to have lower interest rates than youll find on personal loans.
- Can be easy to get. If you have equity in your home, youll probably be able to tap part of it.
Cons of a home equity loan for debt consolidation
- Risk of foreclosure: If you fail to make your monthly payments, you could lose your home to foreclosure. This isnt possible with a credit card.
- Steep closing costs: Home equity loans may have sizable closing costs that eat into the amount you have to settle debt.
- Possibly harder to sell or refinance: Taking out a home equity loan could make it more likely youll be “underwater” on your home, or owe more on it than it is worth.
When you might consider it
You may need to use a home equity loan to consolidate credit card debt if you cant qualify for other options but have a significant amount of equity in your home.
Cons Of Using A Loan To Consolidate Credit Card Debt
Interest rates might not be low enough to make a difference.
You might not qualify for a personal loan if you have too much debt or poor credit.
The lender might charge you an origination fee of 1 to 5 percent of the loan amount.
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Create A Debt Management Plan
If you have a lot of debt, you might consider working with a third-party company that specializes in debt management. These organizations can help you create a plan to manage your existing debt and can negotiate on your behalf with lenders to reduce the amount you owe.
Typically, with a debt management company, youll get a single monthly payment, which can reduce the stress that debt puts on your budget. But there are several drawbacks to consider before committing to this plan.
You might agree to a plan, hoping to save money, but end up paying as much as you owed in the first place. This option can also hurt your credit score, especially if they settle your debts for less than you owe. To avoid predatory agencies that charge high fees, find a reputable option with a nonprofit credit counseling agency.
Use A Debt Consolidation Loan
A debt consolidation loan is a type of unsecured personal loan that’s used to repay higher-interest debt on a predictable payment schedule. Personal loan interest rates reached record lows in Q4 2021, the Fed reports, averaging 9.09% for the two-year loan term.
Since personal loans offer low, fixed rates, they can be used to help consumers save money while they pay off high-interest credit card debt. A recent Credible analysis found that well-qualified borrowers have the potential to save nearly $2,400 by consolidating credit card debt with a personal loan. It may also be possible to reduce your monthly payment.
Use a personal loan calculator to estimate your monthly payments, so you can determine if this debt payoff method is right for your financial situation. You can compare debt consolidation loan interest rates across multiple lenders at once on Credible.
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Sell Trade Recharge Or Regift
There are many people who try to sell their unused gift cards on Ebay. This may work for larger cards, but its still a hassle. Id much rather make it work some other way. Also, sites that allow you to trade unused gift cards are becoming popular but again, I dont want to have to mess with mailing addresses and postage for a tiny balance. There is still the possibility of reloading a card, if its allowed .
Maybe you could regift a card that had its original balance on it? Any other ideas?
Make Note Of Your Balances
Again, simple idea here: Some of the newer gift cards have a little box on the back of the card that let you write in the amount you have left after each purchase. Others give you nothing, so I suggest wrapping a sticky note around it with the balance written on it. The next time youre waiting to check out, you can easily identify which card will have the balance closest to your purchase amount.
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How Does Debt Consolidation Affect Your Credit
Debt consolidation has a positive impact on your credit score as long as you make on-time payments. If you choose a debt management program, your credit score will go down for a short period of time because you are asked to stop using credit cards. However, if you make on-time payments in a DMP, your score will recover, and probably improve, in six months.
If you go with a debt consolidation loan, paying off all those debts with a new loan, should improve your score almost immediately. Again, making on-time payments on the loan will continue to improve your score over time.
The alternative DIY method is obvious: Get rid of your credit cards. Lock em in a drawer and hide the key. Pay for everything in cash. Set aside a portion of your income every month to pay down balances one card at a time, until they are all paid off.
What If This Doesnt Work
If you use a balance transfer and cant pay off the debt quickly OR you have too much debt or a low credit score and cant make this strategy work, you have other alternatives for consolidating debt:
The really good news with both of these options is that you can include debt that was already previously consolidated using a balance transfer. So if you use the method described above to consolidate and then it doesnt work, you can still consolidate in another way.
Discuss options to get out of credit card debt with a trained credit counsellor
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