As American consumers continue to rack up credit card debt, the debate rages on about whether it is better to manage that debt through consolidation loans or some other method. There is no easy answer, as each situation is unique. However, there are some general guidelines that can help make the decision of debt consolidation vs. debt management a little easier.
While many American households carry a balance on their credit cards from month to month, many people have resorted to researching debt consolidation ratings, and doing so typically comes with interest rates of 20-36%. On top of that, the average household owes $8,509 in credit card debt. It’s not hard to see why missed payments can easily lead to a financial crisis for millions of Americans.
If you’re paying 25% interest on an $8,509 credit card balance, that’s $177 in interest alone for one month. Talk about a high price to pay!
With the outbreak of the COVID-19 pandemic, many people were forced to stay home during the first half of 2020. This resulted in a decrease in credit card debt, which fell below $1 trillion for the first time since May 2011. According to data from the Federal Reserve Bank of New York, credit card debt nationwide totaled $890 billion at the end of Q1 2020.
If you are in over your head with credit card debt, where can you turn for help? There are many options available to get your debt under control and we will provide you with resources on debt consolidation vs. debt management.
There are a few options available to those struggling with debt. While a debt management plan through a nonprofit credit counseling agency could be the best option, others include debt consolidation loans, debt settlement, and bankruptcy. Choose the option that best suits your individual situation.
Choosing the best Debt Relief Option for you
Debt relief can come in many forms, but often it boils down to two main methods: debt consolidation vs. debt management. Both have their advantages and disadvantages, so it’s important to understand the main differences. As far as the similarities, the main one is that they both require the consumer to make a monthly payment.
Debt Management: What is it about?
Debt management involves working with a credit counseling agency to create a repayment plan that fits your budget. This plan is then used to negotiate with your creditors to lower your interest rates and monthly payments, and you make a single monthly payment to the credit counseling agency, which then uses the money to pay your creditors in a previously established schedule.
The Pros of Debt Management
- Credit card companies often offer lower interest rates and relaxed fees to these agencies in order to help consumers reach an affordable monthly payment.
- Working with a budgeting agency can help you create a monthly payment plan that is affordable based on your current income.
- A debt management plan allows you to consolidate debt without opening another line of credit. This can be a great way to get your finances back on track without taking out a loan.
- Your credit score is not a qualifying factor.
- Financial counselors provide the tools and education needed to prevent future financial troubles. They help consumers understand their spending and credit habits, set financial goals, and create a budget.
- The option to cancel your commitment at any time is available.
The Cons
- If you miss a payment, your agreement with the credit counseling agency to reduce interest rates and eliminate fees could be voided. This means that your creditors could start charging you higher interest rates and fees again.
- It is required that you close all current credit card accounts and use them only for emergency purposes from this point forward.
What are the interest rates associated with debt management?
Credit scores are not taken into account in order to get approved for a debt management program. According to a recent study, the average credit score for people who use debt management programs is around 555.
Credit counseling agencies work with creditors to set lower interest rates based on the consumer’s ability to pay. In some cases, interest rates could be as low as zero percent and up to 6% for people with very low credit scores (550 or below). For most clients of debt management programs, interest rates are typically around 8%.
Are there any fees involved?
Debt management plans can help you get your finances back on track. They typically charge a set-up fee of $75 and then monthly fees of $30-$55, based on a percentage of your payment.
How does debt management affect your credit?
If you’re looking to get your debt under control, a debt management plan may be a good option for you. This program asks you to stop using all but one credit card, which can help you focus on paying down your debt. While reducing your available credit may have a negative impact on your credit score at first, making consistent payments will eventually improve your score.
Debt Consolidation Loan: What is it?
Debt consolidation is a process where you take out one large loan to pay off multiple smaller debts. This can be an effective way to reduce your monthly payments and simplify your finances by consolidating all of your debts into one place. The lender will typically be a bank, credit union, or online loan company, and the expected payoff time is 2-5 years.
The Pros of Debt Consolidation
- You will have the required funds to pay back all your creditors.
- The interest rate on your debt consolidation loan should be lower than the rates you’re currently paying on your credit cards. This way, you can save money and get out of debt sooner.
- Debt consolidation can help you get your finances under control by combining all your debts into one single payment that should be more manageable to pay.
- While you are repaying your loan, you can continue to use your credit cards.
The Cons
- If you take out a loan, you will have to pay borrowing fees that will add to your debt. These fees usually include origination, maintenance, and late payment fees.
- If you have a high credit score, you may be offered a loan with a lower interest rate. If you have a low credit score, you may not qualify for a loan at all.
- The responsibility to pay creditors and manage your debt falls solely on your shoulders.
- If you do not make your payments on time, you will be charged late fees and may default on your loan.
- There is no education requirement on the part of the lender.
What interest can I expect on a debt consolidation loan?
When you consolidate debt, lenders use credit scores as one important factor when considering whether to give a personal loan. A score of 650 or higher may get you a $15,000 loan at 8% interest, which may be a better option than other loans. But if your score is below 650, the interest rate on the same loan could jump into double digits, or you might not be able to get a loan at all. For example, credit scores below 580 are seldom considered for a loan.
What fees may I end up paying?
Debt consolidation loans can help save you money on interest and fees. But, like any personal loan, there are costs involved. Make sure you understand all the fees before you sign up for a debt consolidation loan.
Origination fees are the most common type of fee charged by lenders. This fee is usually a percentage of your monthly payment, and it can range from 1% to 8%. Other fees you might see include late payment fees, insufficient funds fees, and check processing fees.
Does a debt consolidation loan affect your credit?
Debt consolidation loans add another line of credit to your record and lenders usually perform a credit check, which may temporarily lower your credit score by a few points.
Nonetheless, debt consolidation loans can help improve your credit score in the long run. If you make on-time payments for at least six months, it will eventually improve your payment history, credit utilization, and credit mix. While it may have a negative impact in the short term, in the long run, it can be very beneficial to your financial health.
What are the most common requirements?
- Proof of income: In order to get a loan, lenders will ask for proof of income to ensure that the borrower is financially stable.
- Credit history: Your credit score is one of the most important factors in determining your interest rate. Lenders will look at your payment history to see how you have managed credit in the past.
- Equity: Different types of loans may have different requirements from lenders regarding collateral. For example, loans that are larger in amount may require collateral such as home equity in order to protect the lender from financial risk.
Balance transfer credit card
If you’re looking to save money on your credit card interest payments, consolidating your cards into one with a lower interest rate can be a great option. A balance transfer credit card can especially be beneficial if you typically carry a balance from month to month. Another possibility is transferring your balances to a card that offers 0% APR for an introductory period.
A balance transfer credit card can help you avoid interest charges on your credit card balance, just be sure to pay it off in full during the introductory period (usually 12-21 months). This way, you can keep your finances in good shape and avoid unwanted fees.
Debt Consolidation Loans vs. Personal Loans
When it comes to financial solutions, debt relief and debt consolidation are often confused because they both help with debt. But there are definitely differences between the two, as well as there are with debt consolidation vs. debt management.
If you’re in debt, you may be considering debt consolidation vs. debt management to help pay it off. Both options can be used to pay off unsecured debts, but they work in different ways.
A debt consolidation loan is a single loan that you use to pay off multiple debts. This can be a good option if you’re able to get a lower interest rate on the consolidation loan than you’re currently paying on your individual debts.
How to get a debt consolidation loan
Cleaning up your credit report is an important step to take when comparing debt consolidation vs. debt management. A low credit score and negative credit history can lead to denials.
When considering whether to give someone a debt consolidation loan, lenders will often take a close look at that person’s credit report and credit score. The reason for this is that these factors can provide clues as to whether or not the borrower will be able to repay the personal loan. Generally speaking, the higher the credit score, the lower the interest rate the lender will charge.
If you want to know what’s really going on with your finances, you need to take a close look at your credit report.
Once you’re satisfied with that, you can go to a bank, credit union, or online debt consolidation lender and apply for a loan. Be prepared with details about your income, employment, years on the job, and any other relevant financial information that will help prove you can repay the loan.
When you’re ready to apply for a loan, the first step is to gather all of your financial information. This includes your income, debts, and assets. The loan officer will use this information along with your credit score to determine if you qualify for a loan, what interest rate you must pay, and any other conditions for your loan.
It’s a good idea to apply to multiple lenders so you can compare terms and conditions before making a final decision.
Differences between Debt Relief and Debt Consolidation
When it comes to financial solutions, debt consolidation vs. debt management are often confused because they both help with debt. But there are definitely differences between the two.
Debt consolidation programs aim to pay off all of your outstanding debts. This usually entails enrolling in a debt management plan or taking out a debt consolidation loan, both of which involve merging multiple bills into one monthly payment with the objective of eventually eliminating your debt entirely over the course of 2-5 years.
Debt Consolidation
Debt consolidation is a process whereby you combine all your outstanding debts into one monthly payment. This usually involves working with a debt management company that will negotiate lower interest rates and repayments with your creditors on your behalf. A debt consolidation loan is another option that involves taking out a new loan to pay off all your existing debts. The advantage of this is that you are left with just one monthly repayment at a lower interest rate.
Debt consolidation is a debt relief option that can be helpful for consumers who are struggling to become debt free. It is not the same as other options like debt settlement or bankruptcy, but it can be a good option for some people. If you are considering debt consolidation vs. debt management plans, talk to a financial advisor to see if it is the right choice.
Debt Relief
Debt relief consists more of negotiating with creditors in order to pay a portion of the debt and have the rest forgiven. When you have a lot of debt that is not secured, such as medical bills or personal loans, you may want to consider alternatives like debt settlement or bankruptcy.
Debt Settlement
Debt settlement is an option for those who owe a lender money. It involves offering the lender a percentage of the debt owed, usually between 50% and 75%. The hope is that the lender will forgive the remainder of the bill. Usually, debt settlement is done through a debt settlement company. But it is possible to try to do it yourself.
Debt settlement companies work by trying to get your creditors to agree to accept less than the full amount you owe. This is done by offering a lump sum of cash as payment. The way it works is that you stop making payments to your creditors and instead pay the debt negotiation company each month. Once the debt negotiation company has saved up enough money, they will approach your creditors and attempt to reach a deal.
There is no guarantee that debt settlement will work, and you will have to pay a fee. The company will either take a percentage of your total debt or a percentage of the amount they managed to settle.
Bankruptcy
Bankruptcy can be a viable option for debt relief, but it will have a lasting impact on your credit report. Depending on the type of bankruptcy you declare, it can stay on your credit report for 7-10 years. This will affect your ability to get loans for things like cars and mortgages.
Bankruptcy can be a difficult and complicated process, but sometimes it is the best option for dealing with debt. In a chapter 7 bankruptcy, all debts are discharged and any unprotected assets are sold off. You will need to hire a bankruptcy attorney to handle the proceedings and help you weigh your options.
Debt Consolidation vs. Debt Management, which one is right for you?
Eliminating credit card debt can be a difficult task, but it is possible with commitment and discipline. With debt consolidation vs. debt management, both methods of debt relief require making monthly payments in order to be successful.
There is no one-size-fits-all answer to the question of which form of debt consolidation vs. debt management works best. The answer depends on your unique financial situation and credit score. A higher credit score will usually mean you qualify for a lower interest rate on a consolidation loan, so that’s a good place to start when considering your options.
If you don’t have a credit score of 700 or above, you’re probably looking at paying a pretty high-interest rate. That rate could be lower than what you’re paying on your credit cards, but when you factor in the fees that come along with the loan, it might not be as much of a saving as you thought.
Lenders are not to be messed with. If you miss payments, they will come after you with legal action and debt collectors until you pay them back in full.
Debt management programs don’t consider your credit score. The agencies that offer nonprofit debt consolidation will evaluate your income and expenses to determine if you can afford monthly payments that would eliminate debt within 3-5 years. They’re often able to reduce the interest rate on your debt to below 10%, and sometimes as low as 5%-6%.
Don’t worry if you decide the program isn’t for you and want to quit, there are no penalties. Leaving is not recommended, but you won’t be pursued by anyone seeking payment.
There is no one-size-fits-all when it comes to debt relief programs and deciding between debt consolidation vs. debt management. The best way to find the right program for you is to contact a nonprofit credit counseling agency. They can help you understand your options and find a program that fits your unique situation.
