Credit counselors are trained to help you understand your options for getting out of debt. When you work with a counselor, he will help you understand each of the methods in relationship to your specific financial situation. With this level of understanding, making the right choice for eliminating your debt will become simplified.
Credit Counseling
When you need help digging yourself out of debt, credit counselors are a valuable resource. Trustworthy nonprofit credit counseling organizations, such as those listed with the National Foundation for Credit Counseling, will provide you with the help you need to create a budget and choose from among your options for eliminating your debt, which may include paying your debt off through a systematic self-help plan, consolidating your debt or using a debt management plan.
Payment Plans
Your credit counselor may suggest paying down your debt on your own if you can, since the other options may cause you to have difficulty obtaining credit in the future. Two primary methods exist for paying down your debt: paying off the debt with the lowest balance first, or paying off the one with the highest interest rate first. The benefit to the former method is that you may get a psychological boost from seeing your balance shrink rapidly. For example, paying $100 a month on a card with a $500 balance may be more motivating than paying the same toward a card with a $7,000 balance, since each payment takes a large chunk out of the balance. The primary benefit of the latter method is saving money by paying as little interest as possible on your debt by eliminating the balance that would otherwise accumulate the most interest.
Debt Consolidation
Another method of paying down your debt is to gather up multiple balances under one loan, called a debt consolidation loan. It's important to make sure that you're actually getting a lower interest rate with the loan than you are with your current accounts, or else you won't be saving money and the only benefit of a consolidation loan then becomes making a single monthly payment rather than numerous ones. Also, you need to be 100 percent confident that you will not fall back into old habits of overspending when you take on a consolidation loan, since nothing stands in the way of you and your newly freed lines of credit. Sticking to the budget you create with your credit counselor is helpful in ensuring that you don't rely on credit cards for regular expenses.
Debt Management Plan
Only credit counselors can help you get on a debt management plan. Once you agree to a DMP, your counselor negotiates lower interest rates or payoff balances with your creditors, then puts you on a three- to five-year period of payment, at the end of which you will have paid off all your balances. Debt management plans don't affect your credit score, since the credit bureaus recognize the use of a DMP as your effort to get out of debt, according to Fair Isaac Corporation public relations manager Craig Watts. However, using a DMP may make it difficult to obtain new credit in the future, since lenders will see that you've had difficulty managing your debt in the past.
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