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Understanding the Cost of Debt Consolidation—and the Cost Savings

Getting out of debt always has a cost, but debt consolidation can help you save.

When you’re working to get out of debt, there are inevitable costs involved. If you make regular payments, those costs come in the form of interest rates and fees. If you consolidate with a loan, it will have an origination fee and interest. Balance transfer cards have transfer fees. But how does the cost of a debt consolidation program compare to these other repayment strategies and how much can you really save?

To illustrate the cost savings that you enjoy with a debt consolidation program through Consolidated Credit, we talked to an alumni named Bernadette. She’s used a debt consolidation program twice to pay off credit card debt that she struggled to pay off on her own. And while she paid fees for the program, she says they were nothing compared to what she’d been paying on her credit cards.

“It’s very, very reasonable. The administrative fee is lower than what I was paying in interest. It’s negligible. It is a very small amount for all that work to be handled.”

Here’s what Bernadette had to say about the battles that she’s had with credit card debt throughout her life and how a debt consolidation program helped her save time and money while paying off her debt.

Bernadette’s first battle with debt started five years ago…

Bernadette admits that like many Americans, she struggles with overspending and impulse purchasing. Credit cards make it easy to charge purchases you can’t really afford. You see something you want, so you pull out the plastic. It’s a cycle Bernadette knows well.

“It was not emergency payments. It was absolutely impulse buys. I don’t overspend every month, but I can go through a period where there are times where I make impulse buys that push the balance up.”

While she knew that she needed to do something about her balances, she wasn’t actively seeking solutions. However, social media showed her the light.

“How I first heard about Consolidated Credit was someone on Facebook made a comment about their success. I was in debt, but I wasn’t looking for help. But I knew I needed to do something to take control, so I thought I’d look into it.”

Bernadette called Consolidated Credit and spoke with a counselor. They provided a free debt and budget evaluation on the spot and explained what a debt consolidation program could do for her.

“I called and someone answered all my questions. They really had their act together on that end, so I did it.”

She enrolled all five of her credit cards in the program.

“I was paying almost $200 for those five credit cards. It was $110 after you took over.”

Bernadette was amazed at the cost savings she enjoyed with debt consolidation…

When Bernadette enrolled in the program, she paid a one-time setup fee and a monthly administration fee. Since services like Consolidated Credit are nonprofit, these fees are relatively low compared to other solutions and much lower than the cost of getting out of debt on your own.

Fees are set by the state where you reside and average $49 nationwide.

“It’s a tiny fee for the work that’s being done and that’s reflected every month in those statements. You see your balances going down.”

Bernadette says the fees were nothing compared to the interest she was saving. When someone enrolls in a debt management program with Consolidated Credit, we work with creditors to reduce or eliminate interest and stop any fees, such as late fees.

“Most of my cards were lowered to zero percent interest. And the really good thing about that—aside from making it so much faster to pay off the debt—is that once you go back on the market, the same creditor that was charging 26.9% will not charge 17%. For someone that’s had a very high percentage, 17% is more manageable.”

Unfortunately, old habits die hard…

Bernadette says that once she completed her first debt consolidation program, the credit card companies were quick to contact her with these new offers. The five existing cards that she’d paid off were closed, but she was getting even more enticing offers in the mail.

“Those companies are very smart. I think every one of them once I paid off my credit card debt responsibly send me a new credit application.”

For someone with a shopping habit, it’s just too much temptation.

“It’s like you were an addict, you went to rehab, you cleaned up and went to the halfway house, you got your act together. Then you go out on the street and the first person who walks up to you opens a raincoat and says, ‘How about one of these?’”

Bernadette knew from the financial coaching she’d received with her debt consolidation program that it was a dangerous path, but the temptation was too much for her.

“You know, you’re trying very hard to keep a good record, but they know how to get you. They know we are weak in that regard.”

Flash forward five years and Bernadette knew she needed help…

“I was overwhelmed and depressed because I knew the cycle of what was going to happen and that I would, once again, even at this advanced age of 72, need to free up my credit.”

Bernadette says she was happy that she at least recognized the problem earlier so she could take care of it sooner.

“The first time was a higher debt. This time, I was going down a bad road. So, I needed to nip it in the buy early because when you are in this situation, you are always going to get high interest and that is like shoveling snow in your own path. You need to get it out of your way at that point.”

Bernadette’s interest rates were sky-high again…

“The store credit cards are the worst. Some store cards’ interest rate is 29.99%. That’s one of the highest ones I had. At almost 30%, that’s almost criminal.”

Bernadette says that she was essentially robbing Peter to pay Paul, and even though she was making payments, they weren’t making a dent.

“Minimum payments aren’t going to cut it and even extra money against that minimum payment is going to take so much longer because you are at very high-interest rates.” 

The cost of high-interest credit cards

Here’s what happens when you have interest rates as high at 29.99% and you run up a balance, even a relatively modest balance of $1,000.

  • Your minimum payments seem manageable at around $30 per month
  • But out of that payment, only about $5 goes to pay the principal, which is the actual balance you owe
  • The other $25 goes to cover accrued interest charges
  • So, your balance barely drops with each payment
  • In fact, with minimum payments, it will take 9 years to pay off the debt in full
  • In that time, you pay $1,786.85 in interest charges—that’s right, the interest charges are higher than the original amount charged
  • All told, the $1,000 balance costs you $2,786.85 in total
  • You can test this with your own credit card balances. Look at one of your recent credit card statements. Note the balance and the APR (interest rate) that you pay. Then use the calculator below to understand the time and cost of getting out of debt within minimum payments.

Understand the Cost of Minimum Payments

Bernadette called in the cavalry…

“After making the call, I felt incredibly relieved and had a very positive attitude that we were going to handle this now. The person I talked to really liked their job and explained everything to me about what the process would be like again.”

Bernadette knew how the program worked, but here’s a quick overview:

  1. A credit counselor provides a free debt and budget evaluation to understand your debt and how you got into the challenges you’re facing.
  2. Together, you work out a realistic budget and find a monthly payment you can afford.
  3. Once you decide to enroll, Consolidated Credit’s team gets to work and contacts your creditors.
  4. Your creditors reduce or eliminate the interest rate being applied to your balance and stop any fees.
  5. After all your creditors sign off, you make one payment to Consolidated Credit and they distribute the payment to your creditors as agreed.

“It’s a manageable monthly payment. It’s wonderful because Consolidated Credit is sending that money out every month. They’re taking one payment from you, but they are sending it to all the creditors. It’s less money than you were spending actually. That one payment to Consolidated Credit is less, way less, than what you would be paying on your own if you tried to handle it.”

Bernadette says Consolidated Credit makes getting debt-free easy…

“Consolidated Credit makes it so easy to pay your debt off. One payment, no juggling payments. I just check when my creditors send their bills and to see that Consolidated Credit pays it and that’s it. I call Consolidated once in a while to make sure everything matches up and that’s it. It is really so very easy.”

Unlike other programs that don’t pay your creditors every month and can lead to collections and lawsuits, a debt consolidation program offers full transparency. You can see your balances going down on your account with each payment you make.

“It is something that is so easy for people if they take the opportunity because it’s one payment and you don’t have to worry about the other bills at that point.”

Bernadette also liked that she could put the program, on AutoPay. With the balanced budget her counselor helped her create, she knew she’d have the funds she needed every month, meaning she got away from late fees, too.

“The other thing with being on the program is that you don’t get late fees. When it is on you, something might slip through the cracks and you get a late fee and a bigger payment. I once missed a payment. So, I had a late fee push me over my spending allowance, which put another $65 on it so that’s $110. It’s profit for them and you have nothing to show for it. You’re still going to be in that hole.”

For the first time in her life, Bernadette is saving money…

Now that Bernadette is debt-free, she can do something she’s never been able to do—build her savings.

“I’ve learned to take the money that I no longer have to pay to my creditors and put that in my savings. That’s huge because my savings account was like $2. And even though it’s only at $180-something now, that’s money I never would’ve had. That’s where my emergency cushion is going to be. Before I put out a charge card, I’ll go and pull out that savings.”

Bernadette says she’s even learned the wisdom of putting savings on autopilot from Consolidated Credit’s financial coaches. She set up an automatic transfer, so even though she’s living on a fixed income with Social Security, she’s saving money consistently.

“I just did that today. I get Social Security every two weeks, so I set my savings as an auto bill pay and now that money goes to savings.”

Now Bernadette is an advocate for debt consolidation…

Bernadette says she’d recommend the program to everyone considering debt consolidation and has highly recommended it to her own friends and family.

“Don’t be scared. Give Consolidated Credit a call, talk to one of their counselors, ask all your questions, tell them about your situation, and listen to the information they can give you. There is no pressure whatsoever. On the call, there is never any pressure. That’s big.”

That’s part of Consolidated Credit’s mission as a 501(c)3 nonprofit organization. We’re here to help you end your challenges with debt. If you’re in a situation where there’s a better solution out there for solving your debt, your counselor will tell you about it. The goal is to help you get debt-free as soon as possible while keeping the cost of debt consolidation low.

“They are not trying to sell you anything. They are giving you the opportunity to breathe easier and have a better credit record. Then you’re able to feel good about yourself again. You can’t feel good about yourself when you can’t get yourself out of a hole.”

Bernadette is proud of the improvements she’s seen in her credit score, too.

“My credit score has improved by 60 points.  I was in fair but I’m in the good category now. I don’t remember the exact number. I can tell you that it’s 60 because I just got a report from Experian. I’m in good standing which means my interest rate would be lower if I do need to get a larger item or something.”

She also has this advice for people paying minimum payments…

“Paying the minimum is just treading water—you can’t swim. At that point you’re just treading water and praying that another big problem doesn’t happen and that your water heater does not break, or your car doesn’t break down. And if it does guess where that money is going on your credit cards because you have to find a way to pay for it.”

Instead, she says that debt consolidation is an easy, low-cost way to get out of debt. She lowered her payments and saved thousands, all while getting out of debt faster.

“I love the debt management program. One payment and done. It takes the worry off every month. It’s a relief to know that it is being handled. It really is. Consolidated Credit keeps your spirits up. They make it easy, and effortless. And at the end of the program, you get to be debt-free.”

See how the cost of debt consolidation compares to what you’re paying, so you can decide if it’s right for you.

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