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3 Practical Alternatives To Debt Counseling

Young couple in financial troubleUS News & World Report that asked the question, “Do you Need Help From A Credit Counselor?” This article disclosed how to recognize the warning signs that you might be in trouble with debt and how credit counseling could help. The fact is that credit counseling can be a good idea for some people but there are options you might want to explore before jumping into it.

Understanding debt counseling

If you’re not familiar with debt counseling, it’s where you choose a consumer credit counseling agency or a debt management company to help you pay off your debt.

In most cases, the agency or company will contact your creditors and attempt to negotiate reductions in your interest rates and the removal of any late or over-the-limit fees. Your counselor will help you then develop a debt management plan (or DMP) to repay your creditors. Once you and your debt counselor agree on a DMP, he or she will present it to your creditors for approval. Assuming they all approve your plan, you will no longer be required to pay them. Instead, you will send one check a month to the credit counseling agency and it will distribute the funds to your creditors.

The disadvantages of debt counseling

While debt counseling can be helpful, it does have some disadvantages. For one thing, you will need to give up all your credit cards and not take on any new revolving credit until you complete your DMP, which will likely take five years. You will have to live on a fairly stringent budget and you must have enough money to make the required payments to the credit-counseling agency every month.

A debt consolidation loan

There are several good options in addition to debt counseling and one of them is to get a loan and pay off your debts. The advantage of this is that you’ll likely have a much lower interest rate than the rates on your current debts – especially if most of them are credit card debts. If this is the case, you’re probably paying an average interest rate of 18% or higher. In comparison, you might be able to get a secured loan such as a homeowner’s equity line of credit or equity loan at 8% or less – and save several hundred dollars a month. Plus, you’ll get rid of all those creditors that have been harassing you unmercifully.

”Snowball” or “avalanche” your credit card debt

If most of what you owe is credit card debt, you could either “snowball” or “avalanche” it. If you were to choose snowballing, you would put your credit cards in order from the one with the highest balance to the one with the lowest. You would do everything possible to pay off the one with the highest balance, while still making the minimum payments on your other cards. When you’ve paid off the first card, you can then use the money you’ve freed up to begin paying down the second card and so on.

Avalanching credit card debt works the same way except you put your cards in order of the one with the highest interest rate down to the one with the lowest.

Debt settlement

A third alternative to debt counseling is called debt settlement. The way this works is that you contract with a company to negotiate settlements of your unsecured debts. The settlement company should be able to get your debts reduced by as much as 50%, which could help you become debt free in 48 months or less. Naturally, you will have to pay for this service but the money will come out of the payment you will make to the debt settlement company each month – which should be very affordable.

Click on this link to read the US News & Word Report article.