Getting professional help to consolidate.
Debt consolidation is a great solution in the right circumstances that can make it faster and easier to pay off debt. However, not everyone can consolidate on their own using tools like a personal consolidation loan. If you determine that you can’t consolidate on your own, then you may want to contact a consumer credit counseling service next.
Why consumer credit counseling can help
Consumer credit counseling is a nonprofit service designed to help people who have gotten in too deep with debt. If you’re so overextended with bills already that you can’t qualify for a loan, then you won’t be able to consolidate yourself.
A consumer credit counseling service will evaluate your debts, credit, and budget for free. They make recommendations on your best options to get out of debt.
In many cases, the answer is a debt management plan. This is a professionally-supported consolidation program that’s overseen by the credit counseling agency. Unlike a consolidation loan, you still owe your original creditors. But the agency acts as a go-between to set up a repayment plan that works for your budget and pays back everything you charged to make your creditors happy.
In exchange, they agree to reduce or eliminate the interest rates applied to your balances. As a result, you can pay back everything you owe more efficiently and get out of debt faster.
Why does counseling work when other consolidation options don’t?
Credit counseling helps you overcome two big hurdles that can prevent you from consolidating on your own.
First, there is no credit score requirement to use a debt management plan. You can use it even if you have a credit score below 500.
What’s more, your creditors will agree to reduce or eliminate the interest rates applied to your balances regardless of your credit score. On average, the plan will reduce an eligible consumer’s rates to between 0-11% APR. People who need a debt management plan often can’t qualify for those rates on their own.
The second big hurdle that counseling helps you get over is having too much debt. When you apply for a debt consolidation loan, the lender will check your debt-to-income ratio (DTI). This measures your total monthly debt payments by your total monthly income.
Most lenders won’t give you a loan if your DTI is higher than 41-45%. You essentially have too much debt already to qualify for taking on a new one.
And even if your DTI isn’t over the limit because you have sizable income, you can still have problems using a consolidation loan if you have a high volume of debt. The maximum loan amount for most lenders on personal loans is $50,000. If you owe more than that, a loan won’t help.
By contrast, a debt management plan through a credit counseling agency has no DTI requirement or maximum debt amount. Even if you owe more than $100,000 in unsecured debt, there are credit counseling agencies that may be able to help you.
What to expect when you contact a credit counseling service
- First, you will have a free credit counseling session with a certified credit counselor. Since these services are nonprofit, the initial consultation is free and you are under no obligation to sign up for anything.
- Most counseling is done over the phone and completed in about 30-60 minutes. The counselor will gather information about your debts, income, and expenses. The goal is to get a full understanding of your situation and how you got into the challenges you’re facing.
- They will also do a soft pull of your credit report. This will help them understand your credit profile and whether you might be able to qualify for other solutions. Since this is a soft pull, the check will not affect your credit score.
- Once they have all the information, they’ll make recommendations. As a nonprofit service, they must make recommendations in your best interest. If a debt management plan is not your best option, they won’t recommend it. They may recommend a consolidation loan or even more aggressive options such as debt settlement or bankruptcy.
- If a debt management plan is your best option, they can help you enroll. The counselor will work with you to find a monthly payment that works for your budget. Then they will contact your creditors to get them to agree to accept payments through the agency and to minimize the APR applied to your balance.
- Once all your creditors agree, your consolidated monthly payments start. You make one payment to the agency and they distribute the payment each month to your creditors as agreed.
- Complete the program to pay off the consolidated debt. The program takes a maximum of 60 payments (5 years) and most consumers complete it in about 36-60. Once the program is complete, the accounts included in the program will be closed in good standing.
Counseling helps you avoid more extreme measures
Credit counseling is generally the best solution when you’re facing financial hardship. You’re juggling bills and, as a result, you may have missed a few payments already. This would hurt your credit score, which makes it harder to qualify for a loan at a good interest rate.
In these circumstances, a debt management plan provides all the benefits you need. It minimizes interest so you can get out of debt faster. In many cases, it may lower your monthly payments. It will stop late fees and penalties so it’s easier to catch up.
It also helps you avoid the more severe credit damage caused by other options. Allowing accounts to become delinquent and balances to be charged-off is bad for your credit. Solutions like debt settlement and bankruptcy are also bad for your credit. By using credit counseling, you ensure you’re using the right solution at the right time. You stop any credit damage and delinquencies you may be facing already. Then you avoid causing more damage as you pay back everything you owe.