If you are one of the millions of Americans searching for an effective way out of the credit card debt trap, then you could look to get assistance from one of the many credit counseling agencies that promise to get you back on track effortlessly. However, approaching the wrong company could mean that your problems can get multiplied. Here’s what you should definitely know about consolidating your debt:
Undergo Counselingbefore Consolidation
Before doing anything, you should first make out a list of all your debt, including credit cards, payment for the car, and even the home mortgage. See if the sum of all the monthly payments and your living expenses on food, transport, medical treatment, etc. can be met out of your monthly income. It could be possible that by just curtailing some lifestyle expenses, you will be in a position to meet all the payments on their due dates. If the situation is a little more complex, then you should consider visiting a financial counselor and apprise him of your financial circumstances. If you are completely honest with him, then you can be sure of receiving some really genuine and helpful advice on your next course of action, including whether to undergo debt consolidation. However, beware of counselors who are pushy, judgmental, or even unwilling to take interest in your problems.
Debt consolidation is only workable when the bulk of your debt is unsecured, such as personal loans or credit card outstanding, because they can be aggregated and paid off by taking a single loan that has a lower rate of interest and a payment schedule that you can customize according to your cash flows. You also need to be confident that you will be able to service the monthly payments on the new loan consistently because otherwise, you will end up attracting penal rates of interest as well as steep late payment charges that can make a mockery of your debt consolidation. The biggest element that is actually under your control is your discretionary expenses, however, you need to be realistic as to how much of it can really be trimmed.
There Can Be Wide Range in Quality of the Agencies
Like in every sector, the companies in the financial sector also differ a lot as far as their reputation, the standard of services, ethics, and attitudes go. In a matter that is as valuable as your finances, you need to opt for the most trustworthy and reliable company that you can find. It is a wise decision to look at companies that are accredited by either the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC). This is because the companies have to comply with various standards that are quite rigorous, and counselors are also required to undertake a comprehensive and strict certification program. However, mere affiliation to FCAA or NFCC is not a guarantee that they are above-board. You should check out the number and nature of complaints that customers have registered against them and pick out the ones that have the least.
Red Signals and Negative Implications
Even though consolidation of your debt is quite different from bankruptcy because you are paying off your debt in full, your credit score could still take a hit. This is because creditors will take note of the fact that the debt is being settled with a payment from a third party, which signals that you require assistance in managing your finances. However, if you have already been missing payments in the past, regularizing them can only help to improve your credit score.
Need To Restrict Credit Card Usage
If you are taking the help of a company to manage your debt, the agreement you sign with them will invariably also severely restrict your credit card usage because incurring debt at this stage is completely counterproductive to the consolidation exercise. You will need to be able to adjust to this situation, where you simply cannot flash your credit cards and succumb to temptations.
Only informed decisions and self-restraint can help you get rid of the trap of ever mounting debt. Find the right partner for your debt consolidation and you will emerge a debt-free person within a specific time period.