The average American family has 10 credit cards and more than $15,000 in credit card debt. Nearly half of these households struggle to make the minimum monthly payments, and some use plastic to cover everyday living expenses, such as groceries, gas, and the morning latte. Late and overdue rates are rising and more and more households are missing one or more payments.
If you have debt problems, now is the time to stop this destructive cycle and get the help you need from a debt relief program. This article will teach you the principles of account consolidation, one of the most popular forms of debt reduction.
What is Invoice Consolidation?
Account consolidation — also known as interest rate arbitrage or credit card consolidation — takes your high-interest loans and credit cards and consolidates them into one low-interest loan you can afford. In other words, you take out one loan to pay off many others. You make a monthly payment to a debt consolidator who distributes the money to your creditors until they are paid in full. Only unsecured debt – credit cards, medical bills and personal loans – can be consolidated. You cannot consolidate mortgages, rent, utilities, cell phone and cable bills, insurance premiums, auto loans, student loans, alimony, child support, taxes, or criminal fines.
There are two types of invoice consolidation: non-profit and for-profit. Both types work with your creditors to work out custom payment plans. Contrary to popular belief, non-profit companies charge a nominal fee for their services. If a bill consolidating company is for-profit, you’ll also need to pay an upfront service charge of about 15% of the face value of your debt. For example, if the total amount owed to creditors is $15,000, you can expect compensation of about $2,250.
If you are considering account consolidation, you should know the following first:
1. Consolidating accounts won’t fix your careless spending and saving habits. The only way you will ever achieve lasting financial freedom is by applying the dynamic laws of financial recovery to your everyday life. These smart money principles will help you establish spending and saving habits built on solid foundations. They are discussed in a separate article entitled “The dynamic laws of a complete financial makeover”.
2. You may not qualify for a consolidation loan because of a delinquent credit history. In such cases, you may want to look into other debt relief options such as debt settlement. However, bankruptcy protection should only be considered as a last resort.
3. If your unsecured debt is less than $10,000, account consolidation is probably a better option than debt settlement. Here’s why: Most debt settlement companies require you to have $10,000 or more in unsecured debt to qualify for their services.
4. Since most account consolidation loans are unsecured, the lender can’t claim your home if you can’t keep up with the payments. However, late or missed payments negatively impact your credit score.
5. If a bill consolidation loan is secured and you miss payments, the lender can lay claim to your house or other property.
6. There is no public record that you ever consolidated your debts.
7. Account consolidation should not be confused with debt settlement, another form of debt reduction. In debt settlement, negotiators communicate with creditors on your behalf to settle your debts to lower and agreed upon amounts. Once you enroll in a debt settlement program, your negotiating team will open a trust account for you. You must deposit up to 50% of the face value of your debt into the account over a period of 24-60 months. This money is used to settle your debts with creditors.
8. As we mentioned above, you can only consolidate unsecured debt, such as credit cards or personal loans. You cannot consolidate mortgages, rent, utility bills, cell phone and cable charges, insurance premiums, car and student loans, alimony, child support, taxes, or criminal fines.
9. Account consolidation can hurt your credit scores in the short term. For example, applying for an account consolidation loan from a bank or credit union requires a “hard credit check,” which may affect your scores slightly. More importantly, you need to know how an account consolidation loan can affect your “credit utilization ratio”.
According to Credit.com, “Credit utilization refers to the percentage of your available credit that you are currently using. For example, if the credit limit on all your credit cards combined is $30,000 and you have $15,000 in credit card debt, then your credit utilization is 50%. But if you get an account consolidation loan and close all your credit card accounts, your total debt will still be $15,000, but your credit utilization will now be at 100%, which can hurt your credit score.”
Detweiler adds, “In the long run, a bill consolidation loan shouldn’t hurt your credit score. You may see a dip temporarily because you have a new bill. But if you pay it on time, that should be even If you close all the credit cards you’ve consolidated, you might see your scores plummet – although for some that may be safer than risking taxing those cards and going deeper into debt!”
10. Never be pressured by a consolidation company to join their program.
11. Don’t hire a company that has no interest in your specific financial needs.
12. Before enrolling in a bill consolidation program, review your budget carefully and make sure you can afford the monthly payments. Don’t be surprised if you need to cut out certain non-essential expenses.
13. Before joining an account consolidation program, type the name of the company followed by the word “complaints” into a search engine. Find out what others have said about the company and whether the company has ever engaged in unfair business practices.
14. Find out if the company is a member of the Online Business Bureau and their local BBB. Check their reviews with both agencies and if there have ever been any complaints about their services.
15. Contact all of your creditors and find out if they are willing to work with a particular company.
16. Never pay a debt consolidator until all of your creditors have approved your modified payment plan.
17. Once you start paying the debt consolidator, contact all of your creditors and find out if they are receiving the monthly payments.
18. Whatever happens, make your monthly payments to the debt consolidator on time.
19. An account consolidation company cannot represent you in court unless it is also a law firm.
20. An account consolidation company cannot prevent the foreclosure of your house or the repossession of your car.
Let’s apply invoice consolidation to a typical financial situation:
Let’s say you have $20,000 in credit card debt with an average APR of 23%. Assuming you don’t make additional purchases or cash advances, it will take you 145 months to get out of debt if you only make the minimum monthly payments. You pay $38,085 in interest and a total of $58,085 (principal + interest).
Using invoice consolidation reduces the amount of interest you pay. If you choose a for-profit company, you’ll also pay an upfront service charge of about 15% of the face value of your debt.
Using the example above, let’s assume you choose a for-profit company to consolidate your $20,000 credit card balance. A consolidator negotiates with your creditors for an average APR of 15% and a fixed monthly payment of $402. You must also pay a $3,000 service fee — 15% of your debt’s face value — to the consolidation company.
If you make a fixed monthly payment of $402, it will take you 77 months to be debt free. You pay $10,823 in interest and a total of $30,823 (principal + interest).
Let’s compare your total payments by using bill consolidation and paying only the minimum amount due each month.
Here are your total payments with invoice consolidation:
$20,000 – Original Debt
$10,823 – Interest paid
$3,000 – Upfront Service Fee
$33,823 – Total number of payments
Here are your total payments by paying only the minimum amount due each month:
$20,000 – Original Debt
$38,085 – Interest paid
$58,085 – Total Payments
By using bill consolidation, your net savings will be $24,262 and you will become debt free 68 months sooner than by making the minimum monthly payments.
This article has taught you the principles of account consolidation, one of the most popular forms of debt relief. While an account consolidation program can help you reduce your debt, it doesn’t teach you how to live fiscally sound. The only way you will ever achieve lasting financial freedom is by applying the dynamic laws of financial recovery to your everyday life. These smart money principles will help you establish spending and saving habits built on solid foundations. They are discussed in a separate article entitled “The Dynamic Laws of a Complete Financial Makeover.”