How nonprofit debt consolidation works

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If you’re trying to pay off credit card debt but struggling to do it on your own, you might want to consider nonprofit debt consolidation.

Nonprofit debt relief companies work with your credit card issuers to reduce the interest rates on your credit cards, resulting in lower monthly payments until your debt is paid off. You’ll also end up with one single payment each month rather than having to make multiple credit card payments. But you’ll have to give up using your credit cards during that time.

Here are some things to consider to help you determine if free debt consolidation is a good fit for you.

What is nonprofit debt consolidation?

With nonprofit debt relief, a financial counselor from a nonprofit debt consolidation company works to set up a debt management plan for you. Your counselor will negotiate with your credit card companies to lower the interest rates you pay on your credit cards.

Rather than continuing to pay your credit card companies directly, you’ll make one payment each month to the nonprofit debt consolidation company, and the company uses that money to pay your creditors.

Because of the lower interest rate on your credit cards negotiated on your behalf, you’ll pay the debt off faster, have more affordable monthly payments and pay less in interest. The repayment process generally takes three to five years.

You have to agree, however, to close your credit cards so you can’t run up more debt on them. But you may be able to keep a credit card for emergencies.

Unlike other methods you might consider if you want to pay down your debt, such as taking advantage of a 0 percent credit card balance transfer or taking out a personal loan, with nonprofit debt consolidation, you don’t have to take out a new loan to pay off debt.

Why work with a nonprofit debt consolidation company?

A nonprofit debt relief company is not aiming to make a profit. Much of its funding comes from sources such as grants from individuals and foundations. They also receive voluntary contributions from creditors.

They do charge fees, though. The fees these companies charge clients are used to cover their expenses. The National Foundation for Credit Counseling (NFCC) – the nation’s oldest and largest nonprofit consumer credit counseling agency – says the setup fee for a debt management plan should generally be $50 or less, and monthly fees should be about $25. If you have a serious financial hardship, however, you may be charged no fees.

Fees vary based on states’ laws and on the nonprofit debt relief company you choose.

A credit counselor will review your situation for free to determine if you qualify for a debt management plan.

What should you look for in a nonprofit debt relief company?

When you’re selecting a nonprofit debt relief company, look for one that has received accreditation from an independent organization.

NFCC member companies must be accredited by the Council on Accreditation (COA), an independent organization that accredits more than 1,600 social service organizations in the United States and Canada. Financial counselors with NFCC have been trained and certified.

You can also check a nonprofit debt relief company’s rating with the Better Business Bureau.

How does a nonprofit debt relief company differ from a for-profit debt relief firm?

The aim of a for-profit debt relief company is to make money, and the companies may try to sell you products or services.

The FTC provides insight into these for-profit debt relief companies, which will generally try to establish a debt settlement plan with your creditors. That means the company will try to negotiate with your credit card companies to reduce the amount you owe.

A major drawback with for-profit debt relief companies is they require you to stop paying your creditors. Instead, you deposit money monthly into an escrow-like account, and when the balance reaches a certain amount, the company will try to reach a settlement with your credit card companies. A portion of your money goes to the for-profit company.

There’s a good chance your accounts will be reported as delinquent during that time.

Nonprofit debt consolidation vs. for-profit debt relief

With nonprofit debt consolidation, your financial counselor will work with your credit card companies to lower the interest rates on your debt, and you’ll continue to make regular monthly payments to the nonprofit debt consolidation company, which then passes the money on to your credit card companies. That means you still make payments on time and lower your debt each month, which will help improve your credit.

In contrast, a for-profit debt relief company will tell you to stop paying your bills and instead put money into an escrow account. When the balance gets high enough, the company will try to negotiate a debt relief plan with your creditors. But there is no guarantee that your creditors will agree to the deal.

If you’ve stopped paying your bills and the settlement is rejected, you’ll face even more financial problems.

Even if the settlement suggested for the for-profit debt relief company is accepted, your credit score will take a major hit because you haven’t been paying your bills.

With nonprofit debt consolidation, your credit score may go down some because you had to close your credit cards, but it won’t have nearly the same negative impact as not paying your bills.

The bottom line

A for-profit debt relief company may claim to settle your debts for a fraction of what you owe, but there’s no guarantee your creditors will accept the settlement the company proposes. Because you won’t pay your bills for months, your debts will continue to grow and you might face endless calls from your credit card companies.

In contrast, if you work with a nonprofit debt consolidation company, your debt will gradually be paid back over time, at a lower interest rate, and your credit rating won’t take a major hit. You’ll also avoid calls from bill collection agencies and costly late fees.