Paying off everything we
owe on our own is the preferable way to
handle debt. But sometimes that's easier
said than done. Our circumstances often
change, making it impossible to even make
our minimum monthly payments.
Debt consolidation is a solution sought out by many debtors who are in too
deep. This can be achieved by transferring all debt to a low-interest credit
card, or by taking out a home equity loan. There are also debt consolidation or
credit counseling services that consumers can utilize.
How do these services work?
Credit counseling consists of negotiating with a client's creditors for lower
interest and/or lower payments. Late and over-the-limit fees are often waived as
well. Then the client sends the credit counseling agency one payment each month,
and the agency distributes the money to creditors as agreed upon.
The pros
If you're unable to negotiate lower rates and payments with creditors on your
own, a credit counselor can usually do it for you. This will save you money and
help you get your debt paid off more quickly. The credit counselor can also help
you write a budget to help you stick to the payment plan while still being able
to afford all of your other expenses.
The cons
One problem with credit counseling is that it sometimes does not result in a
monthly payment that the client can afford. Creditors are only willing to
negotiate so far, and if you owe a lot of money you may not be able to afford
the best deal they will give you. If that is the case, you'll have to either
find another means of paying your debt or consider bankruptcy.
Another thing about credit counseling is that it isn't free. Credit counseling
agencies may charge monthly fees for their services, adding them on to your
monthly payment. If they don't, they have to get the money to pay their
employees somewhere. That "somewhere" is usually from your debtors, as a
percentage of your payment.
There is some debate as to how going through credit counseling affects your
credit. It is noted on your credit report. In most cases, you can't get new
credit until you complete the program. But it could also affect you after your
debts are paid off. Many lenders consider credit counseling as being similar to
Chapter 13 bankruptcy.
And finally, it is imperative to check out any credit counseling agency that you
are considering. Just like any other business, there are some that are not
trustworthy. The Better Business Bureau is a good source of information on
credit counseling agencies.
Credit counseling may be able to help you get your debts paid off. But it is
important to consider the pros and the cons of entering such a program. Trying
to work out a deal with creditors on your own may work, eliminating the need to
get a third party involved.
Recommended Reading
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