Debt Counselors: Which of These 3 Ways To Consolidate Debts Is Right for You?
With interest rates typically reduced by 3% to 11%, a DMP helps you save money and stay on track with structured, consistent payments, Lewis-Parks said. Unlike other options, you don’t need to take out new debt, and participants also benefit from financial education to build better money habits.
“However, one requirement is that the accounts included in the plan are closed, preventing further charges. In the long run, most people see an increase in their credit score.”
This kind of a plan is worth it if high-interest rates are preventing you from making progress, Lewis-Parks said. “It’s always better to take control of your finances sooner rather than later, even if it means some short-term credit pain. A lower interest rate and a structured plan can save you thousands and give you peace of mind,” she said.
Consolidation Settlement
Lastly, some people opt for debt settlement, where you agree to settle up an account usually at a reduced amount owed. Karen Carlson, vice president of education and digital marketing for InCharge Debt Solutions, warned against these, except as a last resort.
“Debt settlement is not a good option for most people because only four in seven creditors ever agree to a settlement, it destroys your credit score and you’ll still have debt to resolve after a portion of your accounts have settled.”
Additionally, you’ll have to pay high fees to the settlement company, and there are tax liabilities, so your out-of-pocket is really not going to be different from the other options.
Lynch also explained that while many settlement clients believe they’ll save lots of money because they expect to pay just 50 cents on the dollar, they often don’t realize that the settlement company will charge a hefty fee — generally about 15% to 25% of the amount “saved.” Worse, the amount forgiven through the settlement will be taxed as additional income.
The only time he sees it as worth doing is “if you already have access to a sizable amount of cash — enough to settle all of your accounts within six months — and you don’t care about the significant damage your credit score will suffer.”
When It’s Time To Choose
If you have to choose, debt management plans are ideal for those struggling with high-interest credit cards who feel overwhelmed and will benefit from financial education and long-term planning, Lewis-Parks said.
“Choose a consolidated loan if you have a good credit score (750+), want to simplify payments and can qualify for a lower interest rate than your current debts. It’s best for disciplined borrowers who won’t reaccumulate debt. Debt settlement is for people who are behind on payments, facing collections or contemplating bankruptcy. It’s not for everyone, but it can help in the right circumstances.”
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