This is a guest post from Thomas Bright, a blogger from Clearpoint Credit Counseling. He's a fantastic resource for what a good non-profit credit counseling agency can do for you.
If you’re like me, then you want to do most things yourself. Especially as someone who is budget-conscious, I love the fact that a little elbow grease often saves me a lot of money compared to hiring someone else. I can save $10 or more when I change my own oil, and I probably save hundreds each year by raking my own leaves and cutting my own grass. But you know, there are some things that just don’t make for good DIY projects. For instance, I once took on a home electrical project. Let’s just say that sparks were flying, and they had nothing to do with my love for circuitry. You get the idea—there are things we can do ourselves and things we can’t do ourselves.
The same applies to our finances. Sometimes, we just can’t manage on our own.
Now don’t get me wrong here—my goal is that everyone can manage their finances all by themselves. But there are some circumstances that make this really difficult if not impossible. The big one that I want to talk about today is high credit card debt.
It’s easy to rack up credit card debt, and it usually happens because people either don’t understand the consequences or they get caught in a tough situation where it seems like there is no other choice (for instance a job loss, expensive medical bill, etc.). The issue is that if the problem isn’t recognized quickly, it becomes a much bigger problem thanks to two culprits: our behavior (which causes us to put more and more on our cards) and interest (which makes our debt much more expensive).
At a certain point, the problem can become so difficult that it makes sense to pursue some professional help. I’ll explain more in a minute why I think credit counseling is a safer option than other services, but for now let’s examine when you might need to consider asking for help.
Determining How Much Debt Is Too Much
Don’t just go by the total debt. I think it’s easy to say “$5,000 isn’t too bad” or “$20,000 is a lot of debt,” but these statements lack context. What’s most important to consider is your debt to income ratio. After all, $20,000 is just a drop in the bucket for a millionaire, but it could be over half of a year’s salary for, say, a schoolteacher. Calculating your debt to income ratio is pretty simple: just divide your monthly take home pay by your monthly debt payments (excluding your mortgage).
What you discover here will affect your next move. If your ratio is at or below 15 percent, you are probably in a good spot to continue handling your own debt repayment. If it’s higher than 15 percent, you might need some help, and if it’s higher than 20 you really might be in trouble.
So, where should you get help?
Let’s go back to credit counseling for a second. The reason I’m such a big believer is that we give people a lot of information at absolutely no charge. And, our goal is that we can just help people with their budgets and that they won’t even need additional help (we really want to empower you!). Here are some of the benefits you receive for free:
-You receive a free FICO credit score
-The counselor reviews your credit report (there’s no negative impact to your report in this process)
-You can learn about nonprofit resources in your area that you may not be aware of and that offer additional assistance
-You walk away with a personalized action plan that will help you improve your finances
For lots of folks, the conversation can stop there. But for others, particularly those with really high debt ratios, a Debt Management Program might be in order. These situations are like the electrical project I mentioned earlier. It’s just too much for you to handle on your own, and the professional guidance adds a lot of unique benefits. A Debt Management Program helps by:
-Reducing interest rates on the accounts
-Shortening your payoff time to 3-5 years
-Only requiring one payment to ClearPoint, which we then distribute to your creditors
-Creating peace of mind and a structured routine
-Providing continued education and counseling as you work through the program
-Stabilizing or even increasing your credit score by the end of the program
Editor’s Note: For tips on improving your credit score (while you’re still paying off debt), our friends at Credit Knocks have a great resource showing you many lesser-known ways to boost your score.
Obviously, one of the biggest benefits here is the lower interest rates. That alone can save you thousands of dollars during repayment. While you can also negotiate interest rates by yourself, creditors are much more inclined to work with us, based on our longstanding relationship with them.
One other thing I should mention is that credit counseling and debt management are much safer than some of the other debt repayment options out there. I will spare you the details, but here are my quick thoughts on two common alternatives.
Debt settlement: This is one of the most dangerous forms of debt relief. It requires taking steps that damage your credit score, and it can involve significant fees and tax implications.
Debt consolidation: Certain types can work, but many types force you to take on unnecessary risk. But taking out new debt for old debt, you aren’t addressing the underlying problem or behavior and mistakes here can be very costly.
At the end of the day, my hope for you is that you can successfully handle your budget, debt repayment and other financial goals without any problems. But if you’re in a rut, I hope you consider credit counseling as a first option. It can provide you with significant insight at no cost and even help you pay off credit card debt in a way that may be more beneficial and efficient than if you tackle it alone. If this sounds like something you could benefit from, please don’t hesitate to check out ClearPoint.
Thomas Bright is a blogger for ClearPoint, a nonprofit agency that has been helping consumers achieve financial health since 1964. You can reach ClearPoint at 800.750.2227 or by visiting www.ClearPointCCS.org.
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