Nearly everyone that is presently being dragged under by debt has tried using their credit cards less, and has tried making higher monthly payments than the requested ones, only to see their level of debt increase rather than decrease.
The next stage is to try some sort of system that they've read about, and if they're lucky enough to find one that works for them, then they may eventually get debt free, after a number of years.
If the debt is simply too big and the interest too high, then the debtor's thoughts eventually turn to credit counseling, debt settlement, debt consolidation and even bankruptcy.
Bankruptcy is something that is most often left until last however, because it's generally viewed as an option that will always be there if all else fails. It should be noted however that for some people, and in certain circumstances that it is something that should be done sooner rather than later.
Most people have some idea of what credit counseling means, but they often think it's little more than sitting down and getting some tips from a friendly counselor, but it's much more than that.
What Will Credit Counseling Do For Me?
A good one will,
a) Negotiate a lower interest rate.
b) Set up a repayment plan.
c) Show you how to reduce expenses.
In a great many cases, the credit counselor should be able to reduce a monthly payment of $800 - $900 to around $550.
How Much Does Credit Counseling Cost?
The first meeting should be free, followed by a monthly charge of around $35 per month to cover operating expenses.
What's Different About Debt Consolidation?
Debt consolidation can be compared to an equity loan, that effectively combines all your different debts into a single one, that has only one set of charges, and a lower interest rate than all the others combined.
It should be noted that debt consolidation will only be an option if you have a home or something else of value to use as equity, or if you have a really excellent credit rating.
A good debt consolidation agency should,
a) Carry out all the negotiations, thereby removing a lot of the stress.
b) Get you the very best interest rate.
c) Arrange just one monthly charge.
d) Stop all the harassment.
So How Does Debt Settlement Work?
Debt settlement in essence means that the creditor and debtor agree to new loan terms that are more favorable to the borrower.
The creditor has to be persuaded that it's in its interest to do so, and that refusing to cooperate will result in the debtor declaring bankruptcy, which is the last thing that the creditor wants.
The negotiations are not for the faint-hearted, and they are also very time consuming because many times a deal that was agreed to in principle has to be renegotiated several times.
The reason that deals have to be continually renegotiated, is that a number of different creditors are generally involved, and they have no interest in what you are negotiating with their competitors.
This means that final contracts can only be signed and sealed when an acceptable deal has been arrived at with every creditor.
Any restructuring of debt will have a negative effect on your FICO score, and the amount that it will be affected will depend mostly on how good or bad it was before you restructured it.
If your credit rating has already been shot to pieces, then it should scarcely be affected, whereas one that is excellent will be affected the most.
In theory, if debt consolidation is done right, it should not damage your credit rating at all, as it is in essence using a home equity loan to pay off other debts, but it does mean taking out a new loan, and a restructuring of debts, which credit rating agencies don't like to see,
We mentioned above the need to have a good agent handle your affairs, and that is because there are many flakes out there, and there number is increasing because real estate agents and others that were left without gainful employment due to the recession have entered an arena that they know next to nothing about.
Nobody wants to deny them a living, but it shouldn't be at your expense.
In short, only go with an agency that is BBB (Better Business Bureau) affiliated, and if you don't understand what you're being asked to sign, then don't sign it!
Whichever option you choose, getting out of debt is a positive move, and doing it sooner rather than later is always better.
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The author of this article was a film producer, and award winning film sound editor for many years. He has long been interested in finance and economics, and one of his websites ->
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