We are confident you know that if you are stuck in the “Debt Trap,” that filing for bankruptcy should be your very last option, especially when dealing with credit card debt. The debt trap is where you are making the minimum monthly payment or perhaps a little more than the minimum monthly payment each month on your credit card debt, however cannot get your principal balance to go down. This is mostly due to the interest rates you are being charged. However, we were the ones who incurred the debt, and it is our job morally to pay it back.
Therefore we now have two choices as to how to go about getting out of this mess. Those two chooses are Debt Consolidation versus Debt Reduction. Let’s examine the first one; debt consolidation first. Debt Consolidation is simply taking all of your debt, credit card, medical bills, or personal loans and consolidating them into one monthly payment. In this example, you will give all of your bills over to a debt consolidation company, and they will distribute those monies to each of your creditors each month, minus a monthly fee; (usually between $25 and $50 dollars each month or $300 to $600 annually) Wow, that is a lot of money just in fees alone.
What the debt consolidation companies do is make your monthly payments for you. So what is the advantage to me you may ask? Well, none really. You are just paying someone else to pay your bills for you. Maybe out of sight out of mind works for you however there are some more things you should know about before going down this road.
In fact, many of these debt consolidation companies have prestigious names, or state they are not-for-profit. Those names include: Consumer Credit Counsel or Debt Consolidation Care, however regardless of their name or profit status, they are all pretty much the same. In addition, many Christians also believe that this is the best way to get out debt. However, this is not the case. Not so for one of our Christian financial gurus, Mr. Dave Ramsey. If you read his article here, you will see he is very much opposed to debt consolidation companies. In fact in this article Mr. Ramsey states: “Debt consolidation is nothing more than a “con” because you think you’ve done something about the debt problem.”
Some debt consolidation plans require that you take out a single loan, which you use to pay off all your debts. Debt consolidation (DC) can be a tempting choice when you have a lot of monthly bills, several different creditors, and multiple different interest rates because the result is one monthly payment to one creditor at a single interest rate. In addition, with a debt consolidation plan, your new monthly payment may even be lower than what you owed before, each month, on all your bills added together.
Finally, let us look at the drawbacks to using a debt consolidation company:
- A debt consolidation loan is just another debt you’ll have with yet another creditor.
- Debt consolidation companies do not tell you this, however they place a mark on your credit report that looks like you filed for bankruptcy. Then it stays on your credit reports for 7 more years! A BIG negative.
- The drop-out rate within the first year with a DC company is near 80%, once folks realize that this is not helping them get out of debt.
- Your debt is not reduced when you consolidate, it is simply moved from one creditor to another. You still owe the same amount you did before, just to a different creditor.
- Although your monthly payments may go down with a debt consolidation plan, these lower payments are typically the result of your debt being spread out over a longer period of time. It may take you several more years to pay off your debt consolidation loan, which means that means you could actually end up spending thousands of dollars more in interest to pay your debt off.
- Debt consolidation loans are usually secured debt, which means that you are required to use your home, car, or other personal assets as collateral. Collateral is basically your lender’s insurance on your promise to pay: Miss your payments on your debt consolidation loan, and you could lose your home, car, or other collateral to your lender. (You do not run this same risk with debts like credit cards, for example, which are unsecured.)
- Secured loans can never be negotiated or lowered without refinancing – yet another loan on your credit – which is the opposite of what a debt settlement company can do for you.
- People who are in desperate times often do desperate things. That is why at Nationwide Debt Reduction, we take the time to explain to you the pitfalls and traps to look for. In addition, our professional consultants are trained to educate you first on all the different options that are available to you. We know that every person situation is different. There is no such thing as fitting everyone into the same program.
Now, let us take a look at Debt Settlement (DS) or Debt Reduction (DR) companies. Debt Settlement or Debt Reduction (DR) companies actually contact your creditors, for you on your behalf. They then negotiate your debt down for you (sometimes well below 50%) based upon your financial hardship. DS or DR companies earn their money by incentivizing their negotiators.
For example, let us say you owe one of your creditors $2,500.00. A DR plan may negotiate that down to 40% of the balance or $1,000.00. The negotiator then earns 20% of what he/she saved the client; in this case 20% of $1,500.00 or $300.00. The consumer would end up paying a total of $1,300.00 on a $2,500 debt or 52% of their initial debt. If you only had to pay back 50% of the total amount of money that you owed a creditor (including fees) would that not be a much better plan for you.
However, if we look at this from another angle, let us say that the negotiator has a better relationship with a particular creditor, having worked with them for over 10 years. They know they can get that $2,500.00 you owe down to 30% of the balance owed. In this example you would end up paying $750.00 to the creditor ($2,500 x 30%) plus 20% of what you saved, in this example 20% of $1,750.00 ($2,500 – $750). That comes out to $350. So the negotiator in this example made an extra $50 by getting your debt down another $250.00. Your total payout would be $750 + $250 or $1000.00. If you divide that by the original amount you owed, which was $2,500.00, you would see that you paid back 40% of what you originally owed.
Therefore, with a debt settlement company, the more the negotiators can get your debt down, the more you win and the more they win. What a great deal for the both of you. In fact the creditor also wins because you did not file for bankruptcy.
Finally, did you know that if you have owned your credit card for over three (3) years, you have probably paid off everything you have ever purchased on your card and more? That is why credit card companies are willing to negotiate and settle your debt for a fraction of what you owe. You DO NOT need to consolidate your debt.
Did you know that credit card companies make money every time your debit or credit card is swiped through one of those check-out machines? The retailer or the grocery store has to pay the credit card company a “transaction fee” of between 2.5% to 3%. Sometimes even more! Just look at the local Wal-Mart store near you. How much money goes through those cash registers on a daily basis? Is it $500,000 or maybe even $1 million on the weekends? Multiply that by 2.5% and you get between $12,500 and $25,000 per store per day! That is lot of money for the ‘convenience” of using your credit or debit card on a regular basis.
We trust this helps you better understand the difference between a debt consolidation company and a debt settlement company, the later type of company being far better, safer and morally better.
To learn about this post, or if you are in need of help regarding your debt, please feel free to contact Nationwide Debt Reduction, Inc. (NDR) toll free at 1-800-890-6658. Our professional advisors will be more than happy to answer your questions. If it is after hours (8:00 am -5:00 pm PST) (11:00 am – 8:00 pm EST) you may go onto our Contact Us website by clicking here, fill out a short form, and one of our advisors can get back to you when it is most convenient for you. We are located in the city of Mesa, Arizona in the Phoenix metropolitan area.