Many of you know my personal story. For those that do not, between beginning college and turning 26, I got into $80,000 of student loan, credit card, and auto debt.
Then, I made a commitment to end the financial insanity: In three years, I paid it all off.
When people hear this, they inevitably ask: “$80,000 in three years? For the love of God, how did you do that!?”
To add to the mystery, I didn’t win the lottery in that time. And my salary averaged just $40,000 a year.
Today, I’ll let you in on a secret that helped me pay off so much debt so quickly.
That said, let me add a disclaimer: No one thing accounts for my relatively rapid financial turnaround. I was successful because:
- For most of that time, I worked a second job at night and on weekends.
- I started this blog as a business and began earning revenue from it.
- I moved in with roommates to cut my rent in half.
- Finally, I automated my debt payments with a debt payment consolidation company.
For years I struggled to control my debt by spending less. But as someone who is not a natural born saver, I didn’t have the willpower to spend within my means. So after watching every penny for a couple of months, I would blow my progress in one free-spending weekend.
I began to realize that the road out of debt would have to involve not only learning new spending habits, but also:
- Earning more money
- Automating my debt repayment
- Establishing roadblocks to spending
And that’s what I did.
- I earned more money so I could pay down debt faster
- I automated my debt payments so I wouldn’t spend the money elsewhere
- And I closed most of my credit accounts so there was no way I could use them.
To help me with the last two, I enrolled in the debt consolidation program provided by CareOne Debt Relief Services*.
What debt consolidation companies do
Wait, what? A financial writer had to get…help!?
You bet. If there’s one thing I believe it is that – for the majority of us — we cannot rely on willpower alone to spend less and save more. We must create systems that “save us from ourselves” and make the right financial plays before we can interfere. And that’s exactly what debt consolidation (a.k.a. debt management or credit counseling) does:
- It closes credit accounts so you cannot use them.
- It sets up an automated monthly payment based on your budget and distributes it to your creditors.
- In some cases, it negotiates lower APRs or reduced late fees with your creditors.
For the longest time, I put off closing any of my credit card accounts, even when they were maxed out. I wanted to believe I had the discipline not to use them, and I was worried about how closing accounts would hurt my credit score.
Finally, I realized that:
- I needed to close most accounts completely to remove any temptation to use them.
- The benefit of getting out of debt would be far better for my credit score than the negative impact of account closures.
Once I was on the debt consolidation program, the only credit I used was an American Express charge card for my monthly expenses. Because this card had to be paid in full each month, there was less risk of getting in over my head.
Each month, the program automatically withdrew my payments from my checking account and paid my creditors. Thanks to my second jobs and blog, I was also able to increase my payments a couple times along the way, speeding up the process.
Is debt payment consolidation for you?
As I said earlier, a debt consolidation program isn’t for everybody. I think the best candidates are people who:
- Are in at least $10,000 of credit card debt.
- Have fallen behind on one or more accounts or will fall behind soon.
- Have some accounts with interest rates of 20 percent or more.
- Are having trouble living with their means.
If you haven’t gotten to this point yet, good! But I would explore other options (e.g., consider closing accounts and setting up automatic monthly payments yourself).
For those considering debt consolidation, realize:
- The program will close your accounts and your credit score may drop, at least temporarily.
- These programs consolidate your payments, not your debt (although they will serve as a mediator between you and all your creditors.
- Debt consolidation programs do charge a monthly fee for their services. In my case, the interest Care One was able to save me on one of my accounts meant that, even after the $39 monthly fee (at the time), I saved a couple hundred dollars by being the program. In reality, I may have saved more because I paid off my debts faster.
Researching debt consolidation programs
Debt consolidation programs sometimes get a bad rap for two reasons:
- The industry has scam artists and quasi-legitimate companies that take advantage of the indebted.
- Debt consolidation is not right for everybody, and people who enroll when they should not may have bad experiences.
Before you sign up with any company promising help with your debts, research them thoroughly:
- Look for companies that advertise credit counseling, debt management, debt payment consolidation, or debt relief. Avoid any company that promises to “settle” your debt.
- A company that is non-profit doesn’t mean anything by itself – it’s just a different tax structure.
- Legitimate companies should have a mix of good and bad reviews and be registered with the Better Business Bureau — a lack of any customer feedback is a bad sign.