For a healthy financial future, everyone must balance his or her spending and income. Today, for many people this has become suddenly more difficult with loss of income and now facing excessive debt and thoughts of credit counseling, debt counseling, debt management, and debt consolidation have entered the picture.
Do You Have a Credit Problem?
Unfortunately, for many this has only served to expose a problem that already existed. Why?, because many people are not aware that before the phone calls, card cancellation, or legal action just a late credit card payment will appear on their credit reports and affect their credit rating. Do not wait for that rude awakening when you are refused a simple store credit.
First, obtain your credit information contained in at least one of the major credit-reporting services used by lenders to assess the credit risk you represent. In most states, each of these services (Experian, Equifax, and TransUnion) is required to provide one free credit report per year. Also, if you have been refused credit because of a poor credit score you have the right to a free report.
Debt Counseling or Debt Management
Of course, you may not need credit counseling. If you can work out a budget on your own, do so. However, if unable to manage your finances, seek out a counselor. Credit counselors are financial professionals who work with debtors to come up with a solution to their money woes. Although credit counseling, management of debt, or elimination of debt would seem to be the definition of debt management today they have become two distinct approaches. Of course, credit counseling helps in “debt management” an independent counselor may recommend the need for a “debt management plan” or DMP.
What is Credit Counseling? True credit counseling should serve to help debtors learn the money management skills that will help them stay out of financial trouble or if necessary how to pay there way out of serious debt problems. In fact, any individual who attempts to file bankruptcy will usually be required to undergo debt counseling.
How to Find a Legitimate Credit Counselor
When choosing a credit counselor, beware of any counselor or organization that offers only debt consolidation or a DMP or requires that you to pay a fee prior to any consultation should not be trusted. However, after your positive evaluation of the initial consultation, an enrollment fee and payment for further consultations is to be expected. A fee enrollment and monthly fees should be since debt counselors should be helping you get out of debt, not creating more.
In a first meeting, the credit counselor will review the amount of debt owed, the creditors, and the interest rates and then look at your income and expenditures including rent, food, and other living expenses, as well as any secured debt such as a home or vehicle.
If you wish to use the internet, the first response you should receive either on line or by phone should be a request for a review of your financial situation. It will usually become clear if you are talking to a counselor or a salesperson, if the latter find another website.
Debt Management Plans
Unfortunately, your situation may necessitate that your counselor will have to recommend a debt management plan and will then serve as your advocate to negotiate with the creditors and attempt to reach a middle ground wherein the creditors still receive monthly payments, but on a schedule and rate the debtor can reasonably afford.
The counsellor will negotiate with the banks that own the credit card and often agree to reduce monthly payments stop interest charges. If you negotiate on your own, the credit card bank will usually offer a reduced payment but as a lump sum. This may be difficult and a DMP’s main advantage is allowing payment of a reduced debt over time.
A debt management plan is a structured repayment strategy created by a certified credit counselor in conjunction with the debtor and is a long-term commitment. Depending on the payment your finances can maintain, a DMP may eliminate these debts in as little as 3 years. In some cases, your total payments in that time will add amount to as little as one-half of the amount originally due; however, savings of 25% are more common.
Before signing any DMP agreement, go over your budget and determine if your income allows you to make a little more than minimum payments on your cards each month and still meet your living costs. If so, do not agree to a DMP. Why not, a debt management plan will lower your credit score immediately when noted in your credit reports.
Debt Consolidation
True debt consolidation refers to combining unsecured debts and paying them off with a secured loan against some form of collateral, probably your home. Unfortunately, this means that you have “agreed” to the asset’s forced sale if your new payments are in default. The intent is similar to a DMP in lowering your monthly payment by replacing credit card interest rates with a secured lower interest rate. Moreover, these loans usually require high application fees and extend the years required to pay this new debt.
