The average American family has 10 credit cards and more than $ 15,000 of credit card debt. Almost half of these households have trouble making minimum monthly payments, and some use plastic to cover daily living expenses, such as food, gasoline, and latte in the morning. Late payment fees and over-the-limit fees are increasing, with more and more households missing one or more payments in total.
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 teaches you the principles of bill consolidation, one of the most popular ways to reduce debt.
What is invoice consolidation?
Invoice consolidation, also known as interest rate arbitration or credit card consolidation, takes your high-interest loans and credit cards and consolidates them into a low-interest loan that you can afford. In other words, you are applying for a loan to pay off many others. You make a monthly payment to a debt consolidator who distributes the funds 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 penalties.
There are two types of bill consolidation: non-profit and for-profit. Both types work with your creditors to come up with modified payment plans. Contrary to popular notion, nonprofits charge a nominal fee for their services. If a bill consolidation company is for profit, you must also pay an upfront service fee 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 to pay a fee of around $ 2,250.
If you are considering invoice consolidation, here is what you need to know first:
1. Consolidating invoices will not solve your careless saving and spending habits. The only way to achieve lasting financial freedom is to apply the dynamic laws of financial recovery to your daily life. These smart money principles will help you establish spending and saving habits that are built on a solid foundation. They are covered in a separate article titled “The Dynamic Laws of a Complete Financial Renovation.”
2. You may not qualify for a bill consolidation loan due to bad credit. In such cases, you may want to seek other debt relief options, such as debt settlement. However, bankruptcy protection should be considered only as a last resort.
3. If your unsecured debt is less than $ 10,000, bill 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. Because most bill consolidation loans are unsecured, the lender cannot claim your home if you cannot meet the payments. However, late or late payments will negatively affect your credit score.
5. If a bill consolidation loan is secured and you don’t make payments, the lender can claim your home or other asset.
6. There is no public record that you have ever consolidated your debts.
7. Invoice consolidation should not be confused with debt settlement, another form of debt reduction. With debt settlement, negotiators communicate with creditors on your behalf to settle your debts in small, agreed-upon amounts. Once you enroll in a debt settlement program, your negotiation team opens a trust account for you. You must deposit up to 50% of the face value of your debt in the account over a period of 24 to 60 months. This money is used to pay off your debts with creditors.
8. As we mentioned earlier, 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, auto and student loans, alimony, child support, taxes or criminal penalties.
9. Invoice consolidation could affect your credit score in the short term. For example, applying for a bill consolidation loan from a bank or credit union requires a “strict credit check,” which could affect your scores by a small amount. More importantly, you need to know how a bill consolidation loan could affect your “credit utilization rate.”
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 of your credit cards combined is $ 30,000 and you have $ 15,000 in card debt credit, then your credit utilization is 50%. But if you take out a bill consolidation loan and close all your credit card accounts, your total debt will still be $ 15,000, but your credit utilization will now be 100 %, which can affect your credit score. “
Detweiler adds: In the long term, “a bill consolidation loan shouldn’t affect your credit score. You may experience a temporary drop as you have a new account. But if you pay it back on time, that should pay off. If you close all the bills. credit cards that you have consolidated, you may see your scores drop, although for some, that may be safer than risking carrying those cards and going into more debt. “
10. Never let an invoice consolidation company pressure you to join their program.
11. Do not hire a company that is not interested 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 have to eliminate certain nonessential expenses.
13. Before joining an invoice consolidation program, type your business name followed by the word “complaints” into a search engine. Learn what others have said about the company and if the company has ever engaged in unfair business practices.
14. Find out if the business is a member of the Online Business Bureau and your local BBB. Check their qualifications with both offices and if there have ever been 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 monthly payments.
18. Whatever happens, make your monthly payments to the debt consolidator on time.
19. An invoice consolidation company cannot represent you in court unless it is also a law firm.
20. A bill consolidation company cannot avoid foreclosure of your home or repossession of your car.
Let’s apply invoice consolidation to a typical financial situation:
Suppose you have $ 20,000 of credit card debt with an average APR of 23%. Assuming you don’t make any 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 will pay $ 38,085 in interest and a grand total of $ 58,085 (principal + interest).
By using invoice consolidation, the amount of interest you will pay is reduced. If you choose a for-profit business, you will also pay an upfront service fee of about 15% of the face value of your debt.
Using the example above, let’s say you choose a for-profit business to consolidate your credit card balance of $ 20,000. A consolidator negotiates an average APR of 15% with your creditors and a fixed monthly payment of $ 402. You must also pay a service fee of $ 3,000 – 15% of the face value of your debt – at the consolidation firm.
If you make a fixed monthly payment of $ 402, it will take you 77 months to be debt free. You will pay $ 10,823 in interest and a grand total of $ 30,823 (principal + interest).
Let’s compare your total payments using bill consolidation and paying only the minimum amount due each month.
These are your total payments through invoice consolidation:
$ 20,000 – Original debt
$ 10,823 – Interest paid
$ 3,000 – Upfront Service Fee
$ 33,823 – Total payments
These are your total payments 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 are $ 24,262 and you are debt free 68 months earlier than if you make the minimum monthly payments.
This article has taught you the principles of bill consolidation, one of the most popular forms of debt relief. Although a bill consolidation program can help you reduce your debt, it does not teach you how to live fiscally. The only way to achieve lasting financial freedom is to apply the dynamic laws of financial recovery to your daily life. These smart money principles will help you establish spending and saving habits that are built on a solid foundation. They are covered in a separate article titled “The Dynamic Laws of a Complete Financial Renovation.”