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A lot of Americans have big problems managing their debts. A recent survey shows that nearly 17 percent of Americans have $10,000 or more in revolving credit card debt. To make matters even worse, 35 percent of Americans with credit cards don’t know how much interest they pay each month.
Most credit cards require you to pay at least $25 or 2 percent of your balance per month, depending on which is higher. Assuming that you only make the minimum payment, a $10,000 with 22 percent APR will take you more than 30 years to repay the debt. During that time, you spend about $50,000 on interest.
When you look at the numbers, it becomes obvious why so many people have difficulty getting out of debt. Whether you’re rebuilding credit after bankruptcy or you just want to boost your credit score, debt consolidation and credit repair services might give you an easier option.
Debt consolidation and credit repair try to give you more control over your finances. They have slightly different goals, though, and they work in very different ways. Make sure you understand the differences before you choose an option to get out of debt.
Debt consolidation uses a loan to repay your high-interest credit card debt. You can eliminate the credit card debt quickly, but it gets moved to another lender. Since the lender charges a lower interest rate, you spend less money repaying the debt.
Credit repair focuses on improving your credit history and credit score. It might offer ways to help you lower your debt, but that’s an additional service rather than the central function of credit repair.
Debt consolidation takes your high-interest, revolving credit card debt and lumps it into one loan. You can often use debt consolidation to repay several credit card balances at once. Since the loan used to repay your debt has a lower interest rate than your credit card accounts, you lower your overall repayment amount.
Some debt consolidation companies will work with your credit card companies and other lenders to lower the amount that you owe. The debt consolidation company can make deals by ensuring timely payment. You no longer pay money directly to your credit card account. Instead, you pay the debt consolidator. Since the debt management company can guarantee payment, the credit card company might agree to lower its interest rate significantly.
A debt consolidation company might work with your credit card company to reach a debt settlement agreement. With this option, you stop paying the credit card company. Instead, you start paying money into an escrow account. Once your debt gets large enough, the consolidation company will offer your escrow account funds to eliminate your credit card account.
The benefits of debt consolidation can vary significantly depending on your approach and how much money you owe.
In the example above, a credit card user owed nearly $60,000 repaid over more than 30 years. If the debt consolidation company gives you an 8 percent interest, you can expect to repay the debt within about 21 years without spending more than $200 per month. In the end, you will only spend about $4,800 in interest. You save about $35,000 and you get out of debt much faster.
If you cannot pay your credit card bill, the bank will send your account to collections. When that happens, expect relentless phone calls and letters about repaying your debt.
When the debt consolidation company takes charges of your account, the collection calls end.
Make sure you compare debt consolidation services before you use one. Some charge higher rates than others. You want to make sure you get a good deal and the company follows through with its promises.
Credit repair doesn’t necessarily consolidate high-interest debt to make repayment easier. Instead, credit repair tries to improve your credit history and score by going through your credit reports to:
The company might also send cease and desist letters to your lenders. The letters should mean that harassing calls and letters end. That way, you can focus on repaying debt instead of feeling stressed by constant reminders and threats.
Many credit repair companies offer credit counseling services that teach you how to manage your finances and credit. If you don’t already have these skills, it’s potentially worth learning them from a professional.
Technically, you can do most of the things that a credit repair company offers. For example, you can file disputes to have inaccurate items removed from your credit history. The process can take a lot of time and hard work, though. If you don’t want to commit to a frustrating process, it can make sense to hire a credit repair professional.
Assuming that the credit repair organization succeeds, you can expect to see your credit score and history improve quickly. That will help you qualify for low-interest loans, mortgages, and credit cards. Many people find that improving their credit scores helps them save a lot of money.
Not all credit repair services have their clients’ best interests in mind. Some charge outrageous prices and provide very little assistance.
If you choose one of the best credit repair services, though, you should expect to see quick results at a fair price. Some charge a flat rate for their services. Others work on a subscription model, so you have to pay a monthly fee until all issues get settled. In return for the monthly fee, you should get extra services like credit monitoring that will alert you to potential errors on your credit reports.
Debt consolidation and credit repair only work well when you hire a reliable organization. Always research your options so you can make your decision based on customer reviews, professional recommendations, and prices.