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Are Debt Consolidation Companies Worth It?

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Are Debt Consolidation Companies Worth It?

Debt consolidation firms typically offer programs to settle debts that could negatively impact your wallet and credit score.

by Erin El Issa Senior Writer Data analysis, personal finance credit cards Erin El Issa writes data-driven studies about personal financial matters, credit cards, investments, travel, as well as student loans. She loves numbers and aims to make data sets understandable to assist consumers in improving their finances. Prior to becoming a Nerd during 2014, she was an accountant for tax and freelance personal financial writer. Erin’s work has been mentioned by The New York Times, CNBC, the «Today» show, Forbes and elsewhere. In her free moment, Erin reads voraciously and tries in vain to keep up with her two children. Erin is from Ypsilanti, Michigan.

as well as Jackie Zimmermann Jackie Zimmerman is a former personal-loans and small-business writer for NerdWallet. Her work has been featured in USA Today and Money.com.

Aug 6 7th, 2021

Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years at The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Previous experience included copy editing and news for several Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in journalism and mass communications at Iowa’s University of Iowa.

The majority or all of the products featured here come from our partners who compensate us. This affects the products we feature as well as the place and way the product is featured on the page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of and .

If you’re struggling to make the payments to your credit card, it’s tempting to find a quick and easy solution. While doing this you’ll probably come across businesses that promote debt consolidation. However, the majority of «debt consolidation firms» actually offer a much more controversial product called debt settlement.

For most consumers, is a risky option. It should only be considered after you’ve exhausted alternatives. It’s costlyand could severely damage your credit and savings may take years to realize.

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Debt consolidation vs. debt settlement

A key difference between the two is who is in charge.

Understanding the differences between the two approaches makes sure you don’t end with a loss of money due to a service or outcome you don’t anticipate.

The debt consolidation process is a DIY option that you are in control of. Participating in a debt settlement program puts you in the hands debt relief companies that may or might not be able to successfully settle your debt.

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Programs to consolidate debt

The companies that claim to be debt consolidation companies, like and , in reality, offer debt settlement plans which will require you to stop paying your bills , and instead pay your monthly bills into an account for savings.

If there’s enough cash in the account, usually after six months, the debt settlement company will begin negotiations in conjunction with creditors. If they reach an agreement that you can meet with the creditor, you’ll make the negotiated payment from that account, and pay the debt settlement company an amount for their services.

Companies that offer debt settlement can help you save of between 20% and 35% following their fees.

Are they worth the cost?

The short answer is The answer is to turn to settlement firms for debt only as a last resort. Incorporating a settlement plan could cost you in a variety of ways:

The fees for service can range from 18% up to 25% of your enrolled debt that is equivalent to between $900 and $1,250 for $5,000 of debt. There could also be charges to open and maintain your savings accounts.

If you don’t pay your bills due to late payments, fees and interest are added to your balances. If the company that you contracted with to settle your debt fails to pay any outstanding debts, you’ll end up with these debts.

Your credit suffers a hefty hit and you may be subject to debt collections and lawsuits from your creditors.

There could be an issue , as the amount of debt you didn’t pay is generally reported to the IRS for tax purposes as income.

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An alternative is to DIY

DIY debt settlement: The settlement businesses claim their expertise in negotiations with creditors, but -If you’re certain that the debt settlement option is the most effective option, you could try . It’s a matter of confidence that you’re able to work with creditors, and having enough money in your bank account to settle the debt, but you can save significant time and money.

Do-it-yourself debt consolidation: Getting a handle on debt by consolidating several debts into a single one at a lower interest rate could also help save moneyas well as improving your credit. There are a variety of methods to tackle this issue and include:

Balance transfer credit card: If you qualify for a zero-interest charge balance transfer card can be the cheapest way to pay off your debt.

You should look for an interest rate that is lower than rates for your current credit.

The Home Equity loans and credit lines have low interest rates, but you’ll also put your home at possibility of repossession if do not pay in the time frame agreed upon.

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I still need expert help

If you need expert guidance look into contacting a nonprofit . These organizations can help determine the best way to manage your debt. They can also help you set up a , which can be an alternative that is more secure than the solutions offered by debt settlement companies.

>> COMPARE:

If, after weighing all options, you choose to hire an organization for debt settlement adhere to these fundamental guidelines:

Check the website , or the to see whether the company is registered. Reputable companies will likely be registered to maintain credibility.

Check the . Search for the company within the BBB database to see accreditation information and reviews.

You can ask for trusted family members or friends who have worked with an settlement company.

The authors’ bios: Erin El Issa is a credit cards expert and writer on studies at NerdWallet. Her work has been highlighted in USA Today, U.S. News and MarketWatch.

Jackie Zimmerman is a former small-business and personal-loans writer for NerdWallet. Her work has been featured in USA Today and Money.com.

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