When searching for a way to overcome a debt problem, many people turn to credit card debt consolidation companies for help. These companies provide a very important service, yet they are not designed to help everyone. Understanding what these companies offer, how they charge for their services and the laws relating to this industry is very important. By knowing how the industry works, you will be able to make an informed financial decision when considering this service.
Services Credit Card Debt Consolidation Companies Offer
Credit card consolidation companies are companies that work as negotiators. They create a buffer between you and your creditors, and try to arrange for a pay off amount on your debt that is lower than what you owe, but still acceptable to the company.
They can accomplish this by negotiating to have fees, such as late or over the limit, removed from your debt as well as any interest charged on those fees. They can request to have membership dues removed and interest rates reduced. In some cases they can petition the creditor to forgive a portion of your actual balance.
Once all parties involved have come to an agreeable payoff amount, the consolidation company will help the consumer arrange a loan to pay all of their debts off at once. This is also known as a consolidation loan, and is often secured by the equity in your home. There are companies that advertise that home ownership is not required, but you will still be required to take out a loan to pay off the debts.
Credit Card Debt Consolidation Fees And How Companies May Charge
New legislation went into effect in 2010 that directly affects how debt relief companies may charge for their services. These consumer protection laws were placed into effect to enable more people to benefit from these services as well as weed out fraudulent companies.
As of 2010, debt relief companies can no longer charge up-front fees for their services. They can charge an account activation fee or establishment fee, but it must be a minimal charge. At the time that the account is established the relief company must provide, in writing, the charges for their services. It must be clearly explained and the consumer must have the option to decline any unwanted services.
To collect on their services, the company must have provided the service to the consumers satisfaction and the transaction must be completed. A debt company can not charge for negotiating to settle a debt if both parties have not agreed to a final pay off amount. All agreements must be in writing from both parties before payment for services is rendered.
Will Credit Card Debt Consolidation Save Or Hurt My Credit Score?
When you use a debt consolidation service to pay off your bills it will not hurt your credit as bad as you may think. There will be a small fluctuation in your credit score, but it will bounce back quickly if you make your consolidation loan payments on time.
When credit bureaus rate credit accounts the highest rating that can be acquired is “pays as agreed”. This means that the account holder makes timely payments and no adjustments to the account have been made. The next step down, yet still rates high, is “paid in full.” This is the status you will receive through a debt consolidation pay off. This means the debt is paid to the satisfaction of the creditor, but some adjustments may have been made.
While this rating will drop your score some, it will not hurt your overall credit standing. Having accounts listed as “charge off” or “bad debt” will tank your score. This is what you are trying to avoid when you apply for consolidation relief.
After you have consolidated your bills you can boost your credit score simply by making on-time payments on all your remaining debts and your new consolidation loan. After 2 months of on-time payments your credit score will begin to rise.
Will Credit Card Consolidation Pay Off For Me In The End?
Credit card consolidation is often the best form of debt relief that an average consumer can attain. It is a simple way to condense all your unsecured debts into a single monthly payment. Interest on a consolidation loan is considerably lower than the interest rates on a credit card, which will enable you to pay your debts off faster. On average, a credit card can take up to 30 years to pay off when you make minimum payments on a maxed out card. A debt consolidation loan is often paid off in 3-5 years. People taking advantage of one of these programs will find themselves debt free in a very short period of time, without damaging their credit or going broke.
