As a financial counselor, probably the most common reason people reach out is because they need a plan for debt. There are a variety of reasons why the debt happened- it could have been job loss, an illness, or even just mismanagement of finances. It is not my job to scold or make someone feel bad for the debt but to simply help them find a solution that will work best. That being said, if someone does have underlying issues, such as addiction, gambling or a gap between income and expenses, that needs to be fixed before addressing the debt.
Debt consolidation loans rarely work. More times than not, people build up credit card debt again after consolidating, which makes the problem much worse (sometimes not even fixable the second time around). If you consolidated and are paying on that loan and then have new credit card balances, the hole is even deeper and sometimes pushes a person into bankruptcy. I recommend a non profit Debt Management Program (DMP) instead.
DMP’s do not actually loan you money to pay off the cards, although it feels like a debt consolidation loan because your payment doesn’t change. It is a three to five year program to pay off the debt at reduced interest rates and as small balance cards get paid off, more goes toward the others. Usually the agency can negotiate around 6-8% (so it is especially helpful for cards over 20%!) and then more of your payment goes toward the balances, allowing you to pay off in that time frame. All creditors get paid back 100% so it is much different that debt settlement (which should be avoided unless you do it yourself without the aid of Debt Relief Companies- see earlier blog for details). One thing to note is that any account you put in the program gets closed (by the cc company not the DMP), so only put cards in you no longer wish to keep. This can temporarily lower your credit score, but don’t focus on that while getting out of debt. You will rebuild your score while in the program and credit cards will begin to send offers, in fact you have to be careful or you can get yourself back into debt again.
Debt management can be the difference between spinning your wheels with debt, and actually getting debt paid off and avoiding bankruptcy. You can always try a plan and if you are unable to keep up, it can be cancelled at any time. There is no contract and the fees are very minimal. They usually run between $5 to $50 per month depending on how much debt you have in the program and use that income to pay their employees and keep offices running only. In contrast, Debt Settlement companies charge you 20% of your debt, so for example if you owe $20,000 their program would cost $4,000 and much of it is captured in the first year.
If you think DMP may be a good option, call the National Foundation for Credit Counseling (www.nfcc.org) at 800-388-2227 to schedule a no cost consultation to see what your program customized for you would cost.
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