Are you’re feeling overwhelmed by your debts and have no idea as to how you could take control of your finances? We know this can be a terrible feeling. You may have tried without success to create a budget to cut back on your spending so that you would have more money available to pay down your debts. You may have asked friends and family members for advice – but nothing has worked. You still feel stuck in a pit of debt. Well, take heart. There is help available in the form of credit counseling.
1. Make sure you find a reputable one
There’s probably a credit-counseling agency not far from where you live. There are also numerous ones available on the Internet. You need to make sure you choose one that’s reputable and ethical and that has certified and trained credit counselors. The best are usually non-profit agencies that charge either nothing or very little for their services. Be sure to stay away from those that have big, impressive websites and charge an arm and a leg for their services but don’t do much in return. If you work with one of these outfits, you could end up in worse financial shape and not better.
2. Understand what the credit counseling agency can do for you
A reputable credit counseling agency won’t charge you anything until it has evaluated your finances and created a plan that would help you get out of debt and avoid more problems in the future. If you have a budget your counselor will review it to make sure it’s realistic. She or he may also suggest other ways that you could cut your costs. In the event you don’t have a budget, the agency’s counselor will help you develop one.
3. You will need to provide it with a lot of information
The first time you meet with your credit counselor you need to provide information such as your household budget if you have one, a list of your debts, the amount of money due on each debt every month, the interest rate on each debt and which debts you are behind on. You should also have a list of your assets and their approximate market values and copies of your most recent tax returns and pay stubs. Your counselor will use this information to help you create a get-out-of-debt plan. This will be a sort of road map for getting out of debt and should also help you achieve your financial goals such as saving for retirement or buying a home.
4. It will help you develop a get-out-of debt plan
The second thing a reputable credit-counseling agency will do is figure out how you could keep up with your debts. For example, it might help you revise your budget to generate more cash flow – or the amount of money you have available each month to pay off your debts faster. Alternately, it might recommend that you get into a debt management plan.
5. What is a debt management plan?
If your counselor can’t find a way for you to pay down your debts by reducing your expenses or by earning more money, he or she may recommend that you participate in a debt management plan. If you agree to this, your counselor will figure out just how much you could pay your creditors where you have unsecured debts every month to get your debts eliminated in 3 to 5 years. Once your counselor has determined this, she or he will contact your creditors to see if they would be willing to allow you pay those amounts. In addition, your counselor might also ask for other favors such as eliminating any fees you’ve been charged or reducing your interest rates.
6. Understand that debt management plans have a downside
When your credit counselor finishes preparing your debt management plan, be sure to get a copy. Also, don’t sign your contract until you read and understand it, as it could include some important restrictions. As an example of this, you may be prohibited from running up new debts with your creditors or trying to get new credit until you complete your debt management plan. You probably will be required to give up all of your credit cards. Also, if you fail to make your payments or don’t adhere to your plan, it could be canceled and you might end up in worse shape than before.
7. Your credit score could be damaged
While credit counseling should not have a negative effect on your credit score, some creditors might report to the credit bureaus that you are on a debt management plan or are slow paying. Either of these could hurt your credit score a bit. However, there are statistics showing that if you complete your plan successfully this will actually help your FICO score.
8. What happens next?
When you have signed off on your debt management plan you will then pay the credit-counseling agency every month whatever you have agreed to pay, as well as any monthly fee you agreed to. Your counseling agency will then distribute the money to your creditors. Your credit counselor should send you regular updates on the status of your plan, including confirmation that each of your creditors was paid according to its terms.
Credit counseling is one debt relief program to look at, debt negotiation, debt consolidation loans and bankruptcy are others. Make sure you do your due diligence on all your available choices before you decide which option is best for your situation.