Elon Musk’s SpaceX team just learned what NASA discovered years ago and that’s the task of sending rockets into space isn’t an easy one. In fact, sometimes it can be downright tough. It can also be tough to be heavily in debt. And don’t think that debt still isn’t a problem. There is nearly $1 trillion in consumer debt outstanding and close to 1 million personal bankruptcies every year. There are also a lot of people who can’t refinance their mortgages because either they have bad credit or they’re underwater – without enough equity in their homes.
Fortunately, there are some relatively simple answers to getting out of debt. One of the most popular of these is credit counseling. This is where you contact a credit counseling agency and are assigned a counselor who reviews your finances and helps you either develop a budget designed to get your bill paying back on track or what’s called a debt management plan (DMP) – depending on how serious are your financial problems.
How to know when you need credit counseling
There are some danger signs or red flags that will tell you that you might need credit counseling. The first of these is if you’re receiving calls from debt collectors. Of course, you should have probably sought out consumer credit counseling before you started receiving those calls. A second red flag is if you’re living from paycheck to paycheck. When you’re doing this it means that every cent you earn is spoken for and you’re on a slippery slope. Experience just a small financial slipup such as an unexpected auto repair or a medical emergency and you’ll fall way behind.
A third sign is that if you find you’re hiding financial information and bills from your spouse or partner. Maybe you have credit cards that he or she doesn’t even know about or you’re locking purchases in the trunk of your card because you don’t want your spouse to see you carrying them in the house. A fourth sign is that you’re using payday loans or cash advances because you’re trying to support a lifestyle you simply can’t afford. And finally, the fifth sign you need consumer credit counseling is if you don’t even know how much you’re in debt.
How to know who can be trusted
If you’ve seen many of these red flags in your life then credit counseling can definitely help. But how do you know whom you can trust? There are two credit counseling agency associations that can be trusted. They are the National Foundation for Credit Counseling (NFCC) and the Association of Independent Credit Counseling Agencies (AICCA). Both these organizations have local members that are required to follow the highest standards of credit counseling. This means this is where your search for help should begin.
Before you leap
Before you run off to one of these credit counseling agencies there are some things you need to know about credit counseling in general and how to avoid being ripped off. Here are the five most important of them.
It should cost nothing or very little
No legitimate credit-counseling agency would want you to pile up even more debt by charging you a big fee. The members of the NFCC and the AICCA (formerly known as Financial Counseling Association of America or FCAA) generally charge nothing or very little for their services. For example, if you call the toll-free number of one of these two organizations you will be connected to your nearest local agency where you will get free counseling over either the phone or in person. This can be helpful even if you are not in debt as these agencies can offer advice on saving, budgeting and organizing your finances. They will also counsel potential homebuyers and people looking for a reverse mortgage.
You may get help with a debt management plan
While credit counseling can’t do anything to reduce your debt there is some things it can do. For example a credit-counseling agency can make your debt easier to bear through negotiations with your creditors to reduce your interest rates and “re-age” your debt. It can also help you with a debt management plan (DMP). If you end up with one of these plans you will longer be required to pay your creditors. You’ll send one check a month to the credit-counseling agency instead and it will then distribute the funds to your creditors. If you sign off on a debt management plan you’ll be required to give up your credit cards and not take on any new debt until you complete your plan which typically takes five years.
It won’t affect your credit score
If you go to a credit-counseling agency for help with budgeting or to just get your finances organized so that you can better manage your money this will not show up on your credit report. On the other hand, if you enter into a debt management plan this may be reported to the credit bureaus. If so, it will at least show you are making an effort to repay your debts and it shouldn’t affect your credit score.
You could avoid bankruptcy
If you feel that it’s inevitable you’ll have to file for bankruptcy a debt repayment plan could help you avoid this. If it won’t, most credit-counseling agencies will assist you with the bankruptcy process. For example, it will refer you to a competent attorney that will not make your debt problems worse. For that matter, recent revisions in the bankruptcy code require you to go through credit counseling from an approved agency before you can file.
Most are partially subsidized by major credit issuers
The credit card issuers support nonprofit credit counseling as they want to avoid the losses associated with bankruptcy as this enables them to recover at least some of the money owed them. So if you are told to stay away from a credit-counseling agency because, “its money comes from the credit card companies,” ignore this advice. Both you and your lenders want the same thing, which is to help you avoid bankruptcy and get back on your feet.
Consider the options
There are other options available in addition to consumer credit counseling. For example, if most of your debt is credit card debts you might be able to transfer all of your balances to a new card with a lower interest rate or better yet, a 0% interest balance transfer card. You would then have one payment in place of the multiple payments you’re currently making and it should be less than the sum of those payments. If you own your home and have some equity in it you could get a home equity loan or homeowner equity line of credit and use the proceeds to pay off your debts. This would consolidate them and, again, you should have a much lower monthly payment than the sum of the payments you’re currently making. Finally, there is debt settlement as available from companies such as National Debt Relief. This has become popular because it’s the only way to actually get debts reduced. In fact, a reputable debt settlement company should be able to get them cut in half and help you become debt free in just 24 to 48 months.
If you’d like some additional tips about choosing a credit-counseling agency be sure to watch this short video courtesy of National Debt Relief