Consumer Wise: Managing your debt

By Angie Moreschi, Consumer Wise Host
Last Updated: Tuesday, June 14, 2016, 7:09 AM EDT

Many consumers are once again finding themselves deep in debt and trying to figure out a way to dig out.

“If they call us, that’s a good sign, because they are asking for help,” said Certified Debt Counselor Juan Menendez, with Clearpoint Credit Counseling Solutions in Tampa.

Getting Started

Developing a budget comes first.

“The counselor will develop a budget with the client to make sure, first of all, that their basic needs are met.  We’re not gonna do a debt management plan if it’s going to jeopardize their rent or mortgage payment or they cannot put food on the table,” Menendez explained.

Then, if they can, committing to a debt management plan usually lowers interest rates, waves late fees, and stops collection calls.  

“It’s a big deal because it gives the client peace of mind and any collection activity is stopped,” Menendez says.

How it works

The client sends a lump sum payment to the credit counseling agency every month which is then dispersed to all the creditors.  Non-profits generally charge a monthly fee for the service, based on the amount of debt and number of creditors. Clearpoint Credit Counseling Solutions says the average cost is usually about $25 a month.  

Lenders generally agree to the plans because the odds are higher that they’ll get their money from someone in credit counseling.

It’s not easy.  The average client has more than $25,000 dollars in debt across six or more creditors.  And it takes about four to six years to become debt free.

“A lot of those clients, the majority of them, do not file bankruptcy. They meet their obligation,” Menendez said.

Debt Consolidation/Hidden Dangers

Debt consolidation loans are another popular way people try to get out of debt.  They roll all of your existing debt into one loan and offer the promise of:

  • Lower interest rates
  • Lower monthly payments
  • The convenience of making one single payment

Unfortunately, there are hidden dangers.

“That interest rate for that debt consolidation might be low at the beginning, but it might grow. Read the fine print,” Menendez said.

Debt consolidation can make your payments more manageable, but if you don’t change the behavior that got you in trouble in the first place, you’ll likely end right back in debt; and possibly even worse off.

Beware of these factors:

  • Many end up with high fees, greater debt, and higher interest payments after a low teaser rate expires
  • Many pay more in the long-run.  Understand, a lower interest rate over a longer period of time—might mean lower payments—but generally it also means you pay more over time to pay off your debt. 

And be cautious of consolidating unsecured debt from credit cards into a secured loan, which puts your house or care on the line if you default.  Rarely is that a good idea.

“There are a lot of problems out there with promises and the client has to be very, very careful who they choose,” Menendez said.

Doing it Yourself

If you decide to do it yourself, a good strategy in paying down debt is to determine which cards have the highest interest rates and pay them down first, as quickly as possible. Then, go down the line until the card with the lowest interest rate is paid off.  That will end up saving more money in interest payments over time.

More Tips to Reduce Debt:

  • Live within your means/spend less than you make
  • Get a 2nd job part time
  • Reduce major expenses, like rent
  • Get a roommate/move back home with mom and dad

Finding a Credit Counselor

If you decide to get help, finding a non-profit with counselors certified by the National Foundation for Credit Counseling is a good place to start.

Legitimate services to help do exist, but you need to be careful. The most important thing to understand is there is no easy fix. Getting out of debt and repairing your credit take time and commitment on your part.  That means changing your habits and spending less.