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Avoiding Bad Credit Card Debt Consolidation

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McCarthy Law: Helping Borrowers Avoid Bad Credit Card Debt Consolidation

Every person’s financial situation is different. Consequently, for some, it may make sense to consolidate existing credit card and other debt into one consolidated loan, typically a home-equity loan. Debt consolidation helps you repay your debts through a single monthly payment. In some cases, it may even decrease the amount you pay each month. Of course, debt consolidation isn’t a one-size fits all solution, and determining whether you are a good candidate for debt consolidation is important to avoid bad credit card debt consolidation.

How do I avoid bad credit card debt consolidation loans? Before you sign a contract with any debt consolidation company, ask yourself these five questions:

What kind of debt do I have?

Typically, only unsecured debt can be consolidated. Unsecured debt is any debt that is not attached to a piece of property and includes credit card bills, personal loans, medical pills, payday loans, etc. Mortgages, automobile loans, court judgments, alimony, child support, utility bills, cell phone accounts, debts owed to the IRS, and SBA loans are much more difficult and sometimes impossible to consolidate.

What is my credit score?

Because any loan you get will be based on your credit score, before you decide whether to proceed with the application process, you should find out what your current credit rating is. You may obtain a free credit report once a year from each of the nationwide consumer credit bureaus: Equifax, Experian and Trans Union. However, you’ll have to pay to see your FICO scores. Credit scores range from 300-850. The higher your credit score, the better your options will be with debt consolidation.

Can I afford to make the monthly payments that debt consolidation will require?

The most important thing to remember with debt consolidation is that you are still accountable for all of your debt. Indeed, unlike bankruptcy and debt settlement, you are not relieved or forgiven for any of the principal amount you borrowed. True, debt consolidation can lower your monthly payments by extending the life of your loan and may even lower your interest rates. However, depending on the amount of your outstanding debt and the length of your consolidated loan, this payment can still be unaffordable given your budget constraints. At any rate, you should be skeptical of a debt consolidation company that offers to cut your monthly payments by 50%. These companies often lure customers in with low monthly payments, without ever discussing the total cost of consolidation.

It’s also important to keep in mind that the vast majority of consolidation agencies charge recurring monthly service fees, sometimes as high as 15% of your payment. This is in addition to any upfront fees and closing fees (usually a percentage of any savings you incurred). There is no such thing as free debt consolidation services – even non-profit agencies charge fees for their services.

How quickly do I want to be debt-free?

No doubt you have probably seen the ads on TV featuring “real people” claiming to have become debt-free in weeks with the help of debt consolidation agencies. The reality is, however, that debt consolidation can take up to 15 years to make you debt-free. Again, the amount of time it takes to become debt-free will depend on the amounts you owe, the kinds of debts you have, and the life of the consolidated loan. If you are eager to start anew, debt consolidation is probably not your best solution because it prolongs the debt.

What are my future financial goals?

If buying a house is something you had hoped to do in the next few years, debt consolidation is certainly a better option than bankruptcy. On the other hand, if you aren’t currently a homeowner, you won’t qualify for a home equity line of credit. Although there are other types of consolidation loans available, a home equity line of credit or similar secured loan is usually preferable because it can be secured at a lower interest rate. The more equity you have, the lower the interest rate, and thus the lower the monthly payments you’ll have to make.

Of course, there are many other factors to consider when making a decision such as this. These questions are offered only as a starting point. If you would like to receive further information on your options for getting out of debt, contact our Phoenix, Arizona area office to set up a free consultation. While we are a debt settlement law firm, we offer these consultations completely obligation free, so you’ll never feel pressured to engage our services.

Avoiding Bad Credit Card Debt Consolidation was last modified: November 3rd, 2014 by Kevin Fallon McCarthy
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