Why Use a Debt Consolidation Service?

Debt has become a necessary evil in the modern world. As long as it’s used in moderation, it can help provide our needs and even some of our wants. Unfortunately, it’s a lot easier to get into debt than it is to get out of it. Difficult economic times have added tremendously to the number of people who find themselves in need of relief from an overwhelming debt load.

The services evaluated in this review are aimed at helping you in the relief of unsecured debt which is most commonly that which is owed to credit cards but can also be a result of medical bills or other obligations which aren’t secured by property such as a house or car. Therefore, these services won’t be helpful in cases where the issue is the well publicized mortgage crisis. They also don’t apply to government backed student loans. Whether enduring a debt problem or merely wanting to avoid one, the most important step single step that most people can make is to check their credit report. Check out our objective Credit Report Review for the best and easiest ways to make that critical inquiry.

There are a number of terms that are thrown around in the world of debt consolidation that can be confusing and often seem to be referring to the same thing…but knowing the difference in them is critical. We’ll speak, below, of some of the features of Debt Management and Debt Settlement. While both are forms of debt consolidation, their aims are very different and choosing which is right for your particular circumstance is important. We urge you to read our accompanying article, Surviving the Debt Consolidation Maze, for more in depth understanding of each.

These are some of the benefits that can be realized by using a debt consolidation service:

• Save Money – Put simply, debt consolidation can save you a fortune. Debt consolidation firms can negotiate on your behalf with creditors to reduce or even eliminate interest payments. They can also often successful at getting creditors to remove fees and penalties such as late or over credit limit charges.

In the case of debt settlement, the goal is to actually convince creditors or collection agencies to accept an amount as full settlement of a debt that is substantially less than the total obligation.

• Get Out of Debt Faster – All of the above methods for saving money also shorten the amount of time that it will take to become debt free. Paying off a large credit card debt by making the minimum monthly payments can easily take decades. Consider this typical example: Assume $20,000 in credit card debt with an 18% interest rate and a minimum monthly payment of 2.5% of the debt, or $500. By making the minimum payment, it would take 451 months, or 37 years and 7 months, to pay off the debt! For most of us, that might just as well be forever. Many people find themselves in far worse situations than the one in our example.

Though each individual’s case is unique, with the help of a debt consolidation service, it wouldn’t be unreasonable to expect to be able to liquidate the same amount of debt in as little as 2-6 years.

• Avoid Bankruptcy – Though there are valid arguments to the contrary, most people agree that filing for personal bankruptcy is the final desperate act in solving extreme debt situations. Utilizing the services of a reputable debt consolidation agency can go a long way to preventing this step.

• Salvage FICO score – Beyond the financial costs associated with burdensome debt, your credit score, often referred to as the FICO score (for Fair Isaacs Corporation) is inevitably damaged by too much debt. Though debt consolidation will generally lower the score, at least temporarily, it can have less negative effect overall than bankruptcy or defaulting on obligations.

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What to Look for in a Debt Consolidation Service?

Below are the criteria TopTenREVIEWS used to evaluate Debt Consolidation Services:

Cost of Service
The type of service you may require depends on your particular debt situation and the cost of the service depends on whether your bills are current or just slipping into the past due category or if they’re seriously in arrears. The cost of the service may also be based on the total amount of the debt, the number of creditors involved and your state of residence. Because prices vary according to each user’s individual situation, we established an example case using $18,000 in total debt shared among six creditors. Comparison of prices we were quoted from each provider can be used as an indicator of prices to expect but be aware that every situation is unique.

Debt Settlement service fees are based primarily on a percentage of the total debt or the amount of money that they are able to get creditors to forgive. Around 15% of the total debt or 30% of the amount saved are not unusual. These firms generally also charge an upfront fee of approximately three months worth of payments plus a monthly service fee of around $50. The actual fees are generally rolled into the total monthly payment so their individual costs are somewhat disguised. When considering debt settlement, it is important to know that any amount of debt that is forgiven must be treated as taxable income.

Debt Management services generally charge a monthly fee of around $50 per month to service your account. Some also have upfront fees that can be a few hundred dollars. You should know that debt management services do receive payment from the creditors for whom they arrange payments but those arrangements are essentially not visible to the consumer. It’s clear that the fees paid for debt management services are far less than those for debt settlement. The advantage for the consumer when it comes to debt settlement is that the principal amount of the total debt is drastically reduced so the out-of-pocket charges could still be less than with debt management. It can be accurately stated that of the money paid for debt management, the large majority of it goes to the creditor whereas with debt settlement, a large portion, if not the majority, is ultimately received by the settlement agency.

Length of Time to Becoming Debt Free
The amount of time needed to become debt free will depend on each individual situation. Once debt details are provided to the debt consolidation service, they will make an estimate regarding the length of time that it will take to eliminate debt. The amount of debt will be considered as well as the agency’s experience with creditors involved. In general terms, the debt management process takes longer than debt settlement because the entire debt is paid off. For comparison purposes, one can expect to complete the debt management process in 3-6 years while debt settlement would likely take 2-4 years.

Debt Counseling
The sad part about getting out of debt is that a lot of people resume their old, unsuccessful ways after completing debt consolidation. Also, many people who start a program don’t complete it. To avoid falling into the same old patterns, quality debt consolidation services provide counseling and other tools to help change bad habits and avoid falling back into debt.

Customer Service
A quality debt consolidation service must excel in customer service. Representative need to be knowledgeable as well as empathetic. Many questions will arise during the course of a debt consolidation process and the company must always be willing to provide accurate information.

No one should enter into debt consolidation lightly. Preventing debt problems is, of course, most desirable, but failing that, other avenues of debt reduction should be considered before debt consolidation. Nonetheless, there is a point at which this sort of help becomes indispensible. If you’ve reached that point, carefully read our objective reviews of CareOne, DebtWave Credit Counseling and Coastal Credit Solutions as well as other highly rated firms that seem to meet your individual requirements. Once you’ve selected a couple of contenders, contact them regarding the specifics of your situation.