The average American family has 10 credit cards and over $15,000 in credit card debt. Nearly half of these households struggle to make minimum monthly payments, and some use plastic to cover daily living expenses like groceries, gas, and their morning latte. Late fees and over-limit fees are increasing, and more and more households miss one or more payments in full.

If you have debt problems, now is the time to stop this destructive cycle and get the help you need from a debt relief program. This article teaches you the principles of bill consolidation, one of the most popular forms of debt reduction.

What is invoice consolidation?

Bill consolidation, also known as interest rate arbitrage or credit card consolidation, takes your high-interest loans and credit cards and consolidates them into one low-interest loan you can afford. In other words, you are taking one loan to pay many others. You make a monthly payment to a debt consolidator who distributes the funds to your creditors until they are paid in full. Only unsecured debts (credit cards, medical bills, and personal loans) can be consolidated. You cannot consolidate mortgages, rent, utilities, cell phone and cable bills, insurance premiums, car loans, student loans, alimony, child support, taxes, or criminal fines.

There are two types of bill consolidation: non-profit and for-profit. Both types work with your creditors to come up with modified payment plans. Contrary to popular notion, nonprofit companies charge a nominal fee for their services. If a bill consolidation company is for-profit, you must also pay an initial service charge of approximately 15% of the face value of your debt. For example, if the total amount owed to creditors is $15,000, you can expect to pay a fee of around $2,250.

If you’re considering bill consolidation, here’s what you need to know first:

1. Bill consolidation won’t solve your careless spending and saving habits. The only way to achieve lasting financial freedom is by applying the dynamic laws of financial recovery to your everyday life. These smart money principles will help you establish spending and saving habits that are built on a solid foundation. They are discussed in a separate article titled “The Dynamic Laws of a Complete Financial Makeover.”

2. You may not qualify for a bill consolidation loan due to your bad credit history. In such cases, you may want to look into other debt relief options, such as debt settlement. However, bankruptcy protection should be considered only as a last resort.

3. If your unsecured debt is less than $10,000, bill consolidation is probably a better option than debt settlement. Here’s why: Most debt settlement companies require you to have $10,000 or more in unsecured debt to qualify for their services.

4. Because most bill consolidation loans are unsecured, the lender can’t repossess your home if you can’t keep up with the payments. However, late or missed payments will negatively affect your credit score.

5. If a bill consolidation loan is secured and you don’t make payments, the lender can claim your home or other asset.

6. There is no public record that you have consolidated your debts.

7. Bill consolidation should not be confused with debt settlement, another form of debt reduction. With debt settlement, negotiators contact creditors on your behalf to settle your debts at reduced, agreed amounts. Once you enroll in a debt settlement program, your negotiation team opens a trust account for you. You must deposit up to 50% of the face value of your debt into the account over a period of 24 to 60 months. This money is used to settle your debts with creditors.

8. As we mentioned earlier, you can only consolidate unsecured debt, such as credit cards or personal loans. You cannot consolidate mortgages, rent, utility bills, cell phone and cable charges, insurance premiums, auto and student loans, alimony, child support, taxes, or criminal fines.

9. Bill consolidation could hurt your credit score in the short term. For example, applying for a bill consolidation loan from a bank or credit union requires a “hard credit check,” which could affect your scores by a small amount. More importantly, you need to be aware of how a bill consolidation loan could affect your “credit utilization ratio.”

According to Credit.com: “Credit utilization refers to the percentage of your available credit that you are currently using. For example, if the credit limit on all your credit cards combined is $30,000 and you have credit card debt of $15,000, so your credit utilization is 50% But if you get a bill consolidation loan and close all your credit card accounts, your total debt will still be $15,000, but your credit utilization will now be 100% , which can affect your credit score.”

Detweiler adds: In the long run, “a bill consolidation loan shouldn’t hurt your credit score. You may see a temporary dip since you have a new account. But if you pay it off on time, that should even out. If you close with all credit cards you’ve consolidated, you may see your scores drop, although for some that may be safer than risking loading up on those cards and going deeper in debt!

10. Never let a bill consolidation company pressure you into joining their program.

11. Don’t hire a company that has no interest in your specific financial needs.

12. Before signing up for a bill consolidation program, carefully review your budget and make sure you can afford the monthly payments. Don’t be surprised if you have to eliminate certain non-essential expenses.

13. Before joining a bill consolidation program, type the name of the company followed by the word “complaints” into a search engine. Learn what others have said about the company and whether the company has ever engaged in unfair business practices.

14. Find out if the company is a member of the Online Business Bureau, as well as your local BBB. Check their qualifications with both offices and if there have ever been any complaints made about their services.

15. Contact all of your creditors and find out if they are willing to work with a particular company.

16. Never pay a debt consolidator until all your creditors have approved your modified payment plan.

17. Once you start paying the debt consolidator, contact all of your creditors and find out if they are receiving the monthly payments.

18. No matter what, make your monthly payments to the debt consolidator on time.

19. A bill consolidation company cannot represent you in court unless it is also a law firm.

20. A bill consolidation company cannot prevent your home from being foreclosed on or your car repossessed.

Let’s apply invoice consolidation to a typical financial situation:

Suppose you have $20,000 credit card debt with an average APR of 23%. Assuming no additional purchases or cash advances, it will take you 145 months to get out of debt if you only make the minimum monthly payments. You will pay $38,085 in interest and a grand total of $58,085 (principal + interest).

By using bill consolidation, you reduce the amount of interest you will pay. If you choose a for-profit company, you’ll also pay an initial service fee of about 15% of the face value of your debt.

Using the example above, let’s say you choose a for-profit company to consolidate your $20,000 credit card balance. A consolidator negotiates an average APR of 15% with your creditors and a fixed monthly payment of $402. You must also pay a service charge of $3,000, 15% of the face value of your debt, to the consolidation company.

If you make a fixed monthly payment of $402, it will take you 77 months to become debt free. You will pay $10,823 in interest and a grand total of $30,823 (principal + interest).

Let’s compare your total payments by using bill consolidation and paying only the minimum amount due each month.

Here are your total payments through bill consolidation:

$20,000 – Original debt

$10,823 – Interest paid

$3,000 – Upfront Service Fee

$33,823 – Total Payments

These are your total payments paying only the minimum amount due each month:

$20,000 – Original debt

$38,085 – Interest paid

$58,085 – Total Payments

Using bill consolidation, your net savings are $24,262 and you are debt free 68 months sooner than if you made the minimum monthly payments.

This article has taught you the principles of bill consolidation, one of the most popular forms of debt relief. Although a bill consolidation program can help you reduce your debt, it doesn’t teach you how to live fiscally fit. The only way to achieve lasting financial freedom is by applying the dynamic laws of financial recovery to your everyday life. These smart money principles will help you establish spending and saving habits that are built on a solid foundation. They are discussed in a separate article titled “The Dynamic Laws of a Complete Financial Makeover.”