Have you ever wondered why there are so many debt management companies in the United States? We have a lot of debt, that’s why!
The truth is that there is really only 4 different ways to pay off high interest credit card debt.
- Pay it off over time
- Credit counseling/debt management
- Refinance your home
- Home Equity Loan/Home Equity Line of Credit
Most people are looking for repayment solutions because there is simply not enough money coming in each month to repay their credit card debts at their current balances. They are usually falling behind on payments or making late payments to their creditors. Let’s talk about the other 3 options that don’t involve simply paying off your debts. If you had the money to pay them off, you probably wouldn’t carry a balance each month.
Credit Counseling/Debt Management
Depending on which company you work with, counselors will generally provide reliable advice on how to best handle your credit card debt. You will have to openly disclose all your financial information to the debt management company. The company will then approach your creditors and try to negotiate a lower interest rate. Sometimes, they are even successful at getting a lower overall repayment amount. Credit counseling companies can even get late payment penalties and high interest fees waived for you in some cases. You will then only have to make one single payment to the debt management company each month. The debt management company will turn around and pay all your different credit card bills each month.
Your one-on-one counseling session with your counselor will most likely be carried out over the phone. Take the time to research a lot of different companies before choosing one to work with. Some companies are a better choice if you need advice on credit counseling and getting out of debt. Other companies are just interested in getting you approved for loan consolidation. There are many non-profit credit counseling companies in America. While they will most likely have monthly fees to work with them, at least they are not profiting off of your financial misery.
Sometimes you might be provided a debt management solution where you will be advised to consolidate your high interest loans into a single larger loan. By doing this, you will only have to make a single payment to the debt management company (with less interest), and they will pay off all your creditors in one lump sum. These consolidated loans are usually at a much lower interest rate than your credit cards.
Refinance Your Home
Additionally, you might be able to tap into your homes equity to pay off your debt. By refinacing your home mortgage, you may be able to replace multiple loan payments with one single payment to the mortgage company each month.
Home Equity Loan/Home Equity Line of Credit
If you can not refinance your mortgage and draw money out of your house, then you may be able to tap into a low cost home equity loan, or HELOC (Home Equity Line Of Credit). The equity in your house is usually a lot less expensive than paying higher rate credit card interest long term. Mortgage interest is usually tax deductible as well.
If you are trying to consolidate student loans with your credit card debts, pay attention to the fine print! Federal student loans in the United States are consolidated differently than credit card debts are. It’s important for you to know that federal student loans are guaranteed by the U.S. government. If you have existing loans then they are purchased and closed by a loan consolidation company or by the Department of Education (this depends on the type of federal student loan debt that the borrower has). Student loan interest rates can fluctuate between approximately 5% up to a maximum of 8.25% for federal Stafford loans. The interest rate can be up to 9% for PLUS loans.
There have been some concerns raised, and rightfully so, about the use of consolidation loans in debt management. Most financial experts worry about the temptation to consolidate your unsecured debt (credit cards) into a secured debt (mortgage or HELOC). In order to get the lowest interest rates, your debts will most likely be secured against your home’s value. While the monthly payments may be lower each month, the total amount of debt repaid is going to be much higher due to the longer period of repayment.