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If you’re looking for help, something is wrong. If you’re looking for help with debt, something is wrong with your spending. There are many choices for help with debt matters, but the most important decision to be made is internal: you must be willing to make changes in your behavior. If you can’t, you won’t be able to take advantage of the help you get.
Your options when you have debt problems include realistic budgeting, credit counseling from a reputable organization, debt consolidation, some combination of the three; or bankruptcy. Debt negotiation also a choice, although that often occurs to some degree during the process of credit counseling. The choice that will work best for you depends both on how serious your debt is, and how willing you are to institute personal discipline.
Credit Counseling
Credit counseling generally involves working with a professional who will help you work out a personal budget, which is then married to a debt management plan (DMP). Do some sleuthing before you select a credit counselor and shy away from big fees and big promises. An ethical credit counselor may do some negotiating with your creditors to get your payment schedules adjusted and possibly get some of your debt reduced.
Many credit counselors get a kick back (called a Fair Share) from major credit agencies on payments that their clients make on delinquent debt. That doesn’t mean they are unethical counselors; it’s the nature of the industry. But understand that participation in a DMP will impact your credit rating, due to the adjusted payment schedules and possibly a portion of debt that is forgiven.
Debt Consolidation
The concept of debt consolidation involves borrowing at a relatively low interest rate in order to pay off short term debts with higher interest rates. Homeowners can do this with home equity loans, and realize the tax break that goes with the payments on a second mortgage. There are also unsecured debt consolidation loans available; finding the right one is critical. Many of them have high fee structures because they know their clients may be desperate. This type of loan requires that you calculate the cost of the loan; fees included and compare it with the cost of paying off your existing debts with their current interest rates. Finding the right debt consolidation loan requires a sharp pencil.
There are also a multitude of credit card companies offering zero percent interest on their “credit consolidation” credit cards. These cards are like adjustable rate mortgages in that their interest rates will soar in a relatively short period of time. Get out the calculator again and decide if it’s worth it. Will six months of no interest balance out the higher rates that come later? That depends on how long you intend to take to pay off the consolidated debt. You need to also compare the totals for the consolidated card and the existing collection of payments at, say, 24 months, at 36 months, and so on.
There is also the option of refinancing the “no interest for six months” card at the end of six months. That, however, is putting a band aid on a hemorrhaging problem. Further, rolling over credit cards every six months won’t look particularly good on your credit record.
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