Debt Consolidation: Credit Services That Add Up

April 15, 2010 - PRLog -- Debt consolidation is a common alternative to paying back credit debts where balances are reduced faster by dropping the finance charges to lower fixed rates. This allows the average consumer to payback their debt at a lower, more affordable monthly payment and become debt free within 5 years instead of the ladder. 

The ladder is a long and expensive climb. Paying off credit card debt the traditional way can cost you double the amount charged or more. Standard minimum monthly payments are designed to enable the average consumer to stay current with their payments at an affordable rate. Unfortunately theses minimum payments combined with the high interest rates do not get you out of debt.

Understanding the aforementioned is nice, but numbers talk. Seeing in black and white the comparable savings as to where you are and where you could be financially could really help you decide your best option for debt elimination.

Please note: The figures in this example are from a real client enrolling in a debt consolidation program. Names and locations have been changed to protect the identity of the consumer. For this lesson, we will call the consumer…Obama. 

Obama has a credit card with an outstanding balance of $7,100.00
His current APR is 16.24 percent.
Obama’s current minimum monthly payment is $153.

At 16.24 percent on a balance of $7,100 Obama is paying around $96.00 in finance charges monthly.
- $1,152 annually -

Of $153.00 each month $96.00 is going to interest.
This leaves $57.00 to be applied to the outstanding balance of $7,100 with every $153 payment.

If Obama continues to make his minimum monthly payments at these rates he will be debt free in 124 months. That equals 10.3 YEARS of $153 payments to pay off $7,100 in credit card debt.

124 months X $153 monthly payments = $18,972.00 total to pay off $7,100 in credit debt.
This comes out to around $11,904.00 paid back in interest alone over the estimated term.

$18,900 to pay back $7,100 over 10.3 years. Well that sounds fair right?

Imagine if your APR was in the 20-s…or even 30-s…ouch…

Obama realized this was un-American! – And decided to consolidate his credit card.

After consolidating Obama noticed the APR dropped to a lower fixed rate and re-did the math.

Obama has a credit card consolidated with an outstanding balance of $7,100.00
His consolidated APR dropped to 2 percent. That’s T W O percent, correct.
Obama’s new monthly payment in the consolidation plan is $142.

At 2 percent on a balance of $7,100 Obama is paying around $12.00 in finance charges monthly.
- $144 annually -

Of $142.00 each month $12.00 is going to interest.
This leaves $130.00 to be applied to the outstanding balance of $7,100 with every $142 payment.

If Obama continues to make his minimum monthly payments at these rates he will be debt free in 55 months. That equals 4.6 YEARS of $142 payments to pay off $7,100 in credit card debt.

55 months X $142 monthly payments = $7,810 total to pay off $7,100 in credit debt.
This comes out to around $710.00 paid back in interest over the estimated term.

So Obama does not save much on his regular minimum monthly payment from $153 to $142.
Obama is saving $84.00 a month in finance charges, going from $96 to $12 from the interest reduction. In paying off the debt through a nonprofit credit counseling agency Obama will have saved around $11,000.00 in just interest alone.

Imagine the potential savings with multiple accounts. 

Now of course, as the balance decreases so does the amount of the finance charges- but the minimum monthly payment required also decreases, which continues the cycle.

So ask yourself. Does debt consolidation add up for you? Are you willing to pay back double what you charged? If you are in a financial hardship can you truly afford to spend so much more in interest over time? Can you think of anything else you could have done with $11,000.00? I can.

In searching for a debt consolidation agency reputation is important. Be sure to check the company out online with the Better Business Bureau. Find client testimonials from people who have used their services in the past. Make sure the company is a true nonprofit and not some chop shop. Fees for service should be nominal. Enrollment fees should be less than $100. Monthly service fees over $50 a month start to take away from the interest savings by consolidating.

Improve credit and get out of debt with our BBB Rated A+ counseling services. Contact a certified credit counselor for a free budget counseling session and debt analysis to see if consolidation is right for you. Call 800.905.1563 or visit our website freedomdm.org and complete our contact request form or speak to a credit counselor via our LIVE CHAT feature. You can be debt free, Freedom Debt can help. x/Michael Brazier

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Certified credit counselors work with potential clients to assess their current financial situation and determine what their best option may be.