Wednesday, November 28, 2007

Counseling versus Consolidation. What?

There are two distinct moments someone in debt will always experience at the very beginning of their journey.

The first being the blissfully ignorant moment. Where everything is rosy and nice. Sure, you may have a lot of owed money, but you haven't sat down to examined your finances quite yet. You think sure, it's going to be okay paying below the minimums on my sixteen credit cards. Buying stuff is a lot of fun! You're likely young and a bit naive.

The next moment is the complete opposite, a ying to the other's yang. This is when everything comes crashing down all around you and oops, you suddenly realize that you not only cannot afford the rent, but food as well.

The second moment is naturally the most difficult. That's when everything becomes tinted by the past and you start researching your unfortunate situation a bit. Sure, you've seen TV commercials and those annoying flash ads before. Some poor bastard making a phone call, and poof, he's throwing his credit cards into a wood chipper!

It's all vague without a lot of explanation. Just promises that advertise happy, happy people. Even worse, there is a lot of jargon saturating the market. Sure, some folk try to dumb it down, but that makes you feel even worse.

In those initial stages it's difficult. You're scrambling, stressed and likely a bit annoyed with all the promises that seem quite transparent.

A couple of days ago I spoke with a young lady who is doing her best to pay off what she owes, but had no idea as to the difference between credit counseling and credit consolidation. Maybe if the information was made accessible to her she would have been better able to assess her situation. I'm going to explain why one might give you a better deal than the other.

Someone who's a bit green to the situation might be concerned about the whole issue, but a hardened veteran might not even bat an eye.

But that's okay. It's a learning process.

And the best part? I'm not trying to sell you anything. I'm not going to provide you with any referral links, just keyword explanations. Google any of my keywords and you'll likely find a service or two. Just be wary. It's an important issue, finances.

Have one you especially like? Share in the comments! I'll link back to your blog in my next post.

  • Credit Counseling Service (CCS): There are a number of Credit Counseling Services out there. I've heard both good and bad stories in regards to them. A CCS is a corporation who specializes in (a) debt education and (b) debt management.

    Essentially, when you become a client of a CCS they will pore through your budget, pay stubs and debt situation. They will then work with your creditors to (a) freeze your outstanding balance (so you can throw those credit cards in the wood chipper), (b) reduce your interest rates and (c) consolidate it all.

    See, that's where it gets tricky. Consolidation. It's a big word, sorta'. The kind of stuff you've heard before, but never thought about. What does it mean? It means they lump everything together. That's it. Nothing special or fancy.

    You more or less arrange for a single payment to be sent directly to the service and they will then divvy up the dough and electronically pay all your creditors.

    They will then charge you a small fee for their services, say, $15 - $30 a month.

    • The benefit? You don't have to worry about anything besides that one payment. There's no room for error on your part. All you have to do is make one payment and they take care of everything. And you'll get a lovely little statement each billing cycle telling you how much closer you are to freedom.

    • The downside? Well, besides the obvious (paying them $15 - $30 a month to handle your accounts for you), some creditors may refuse to work with your CCS. A prime example is American Express.

      So you will have to continue to pay some of your outstanding debts regularly.

    • The verdict? I use a Credit Counseling Service. It fits my situation. I have a lot of outstanding balances spread out over many accounts. Even if I diligently monitored myself and my amount due, I'd have 13 accounts in the red to worry about. Now, instead I worry about only 5. (The CCS, 2 American Express accounts, 2 car loans). It makes my life easier and as such, I believe it's well worth the money.

    I plan to take over the accounts myself once more things fall into place and I feel confident I can handle all my accounts in the red.

    Keep it mind, a credit counseling service is NOT a debt consolidation service. What's that? Well, it's a good thing you asked!

  • Debt Consolidation: This is very different than a credit counseling service but the term appears just as often, if not more. It's really just another loan.

    It's a lot like paying your rent with your credit card.

    In short, a debt consolidation corporation will pay off all of your loans right off the bat with their own money. You will then owe them, and only them money at their own interest rate.

    • The benefit? Your consolidated interest rate is going to be much lower than say, your credit card interest rate. You now have only one big bill, instead of 13 medium sized bills.

    • The downside? If you go to a debt consolidation corporation, you're now committed. You are at their mercy and their mercy alone, while if you had paid the bills yourself over time, you would not. More often than not you can walk away from a credit counseling service whenever you want, you cannot walk away from a consolidation loan. Just like how you can't really walk away from a mortgage.

    • The verdict? I'm not going to come right out and say "don't bother," but if you feel this solution is good for you, really do your research.

    Especially if you sign over collateral (which is sometimes required.) This occasionally means the client will have to put their home or car up on the chopping block should they be unable to make successful payment.

    Which in my humble opinion, is trading a bad situation for a potentially severe one.
To the layman, it's sometimes easy to get lost in the jargon. But that's all right. You're not planning on being in debt forever, are you? I get confused often enough myself, but that's what the internet and bloggers are for, surely.

1 comments:

Willow said...

I used a non-profit credit counseling group several years ago when I was in dire financial straits. It had good and bad aspects. The good: it made me sit down and examine my finances and motivate me to make major changes in my life. The bad: they consistently made my payments late, sometimes holding my payment for as much as a month before sending it to the creditors. My credit rating tanked. It didn't improve until I "fired" the credit counseling agency and did it myself. So my advise is be cautious.

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