SayEducate

Those ads on cable television seem to be played over and over again: companies offering debt management solutions to help you overcome your financial burden. On the surface, they sound like a godsend, but in reality what you could really be getting may leave a long lasting sting.

Even when the economy is humming along, there are plenty of consumers who find themselves over their heads in debt. Today, with the economy slowing to a crawl, the numbers are mushrooming, providing an ever growing customer base for “credit counselors” to work with.

Typically, when you use one of these companies you’ll sign on with the promise that they’ll get you better interest rates and lower your monthly payments. What you don’t always find out is that your credit rating will be wrecked in the process.

Debt Management And Your Credit

Specifically, if you use most debt management services and then apply for a mortgage, lenders will rate you the same as the consumer who filed for Chapter 13 personal bankruptcy. Why is that? Because in order to extract the better rate from your debtors, they will lower your creditworthiness to the point where your credit standing is, in effect, trash.

So what is the solution to overwhelming debt? Answer: develop your own get-out-of-debt plan. It isn’t easy to do, it takes time, and it is a lot of work, but it’ll do something for you that no debt management company can: preserve your creditworthiness.

For additional tips, please check the resources which follows this article.

Resources

Reduce Credit Card Debt

Reduce Personal Loan Debt

Reduce Mortgage Debt

Reduce Student Loan Debt

You are behind on your mortgage payments and are struggling to keep up with your credit card and car payments. Food and gas have gone up in price and your recent raise at work was a paltry 2% — moreover, your job may be outsourced to China or India in 2009, putting additional pressure on you.

To top it all off, your mortgage rate will reset this summer adding an additional $300 to your monthly expenses. Worse, you cannot refinance at a favorable rate because your creditworthiness has slipped due to your late payments.

Does this scenario sound far-fetched? Unfortunately, it isn’t — at least for some cash-strapped consumers. Indeed, although mortgage rates have dropped and are near historic lows, some consumers are finding that they cannot refinance, putting themselves into a precarious position: should they simply walk away from their homes?

Just Walk Away, Renee

One website is encouraging consumers to walk away, but I’m not going to link to them. There are some serious consequences to abandoning your financial obligations, long term headaches you should know about. Let’s take a look at the consequences and what some options are available for you.

Consequence Of Leaving Your Home Behind

Of course, you can simply pack up your goods and leave your home. But, if you do then you’ll quickly discover:

Your creditworthiness will nosedive. If you walk away, your home will be foreclosed and your credit will plummet. Getting a new job, renting an apartment, or doing almost any other activity which requires someone to access your credit report will become very difficult. If you think that you have problems now, just wait.

Your other creditors will take action. Creditors share information about you with each other. If you walk away from your home, then your credit cards will likely reset to a default rate and you’ll be ineligible for new credit, perhaps for many years.

Smart Action You Can Take

If you aren’t able to refinance your home and you cannot afford future payments, then the following should be considered:

List Your Home. Seek out the services of a real estate agent who can help you sell your home. You can explain your plight to her, but request that your financial situation not be made known to potential buyers. You don’t want a “fire sale” for your home, you would prefer to get out from under this obligation unscathed.

Sell Your Home. Last week, I made mention of one option for getting out of your home — short selling. In summation, short selling allows you to find a buyer who offers to buy your home for less money than what you owe on your mortgage. Although this is something mortgage brokers hate (and aren’t required to accept) there are certain situations where a short sell makes sense. Please read that article for more information.

Do Not Act In Haste

Perhaps the best advice for you is to not act in haste. Take care that you don’t fall prey to scams where someone will offer to lend you money for the short term, but for a high rate. There are people who are looking to entice cash-strapped homeowners into taking out high-rate second mortgages which can only worsen your problems.

Above all else, talk with your current mortgage lender and see what can be worked out. Get help through a credit counselor and only consider personal bankruptcy as a last resort.

Further Reading

Get Above Water: When You Are Struggling to Make Mortgage Payments

Debt Management Tips

Home Refinancing (Tips) 

If you delayed your Christmas shopping until the days just before the holiday, then you probably escaped the early January credit card bills that tend to show up around the first of the year. A thirty-day reprieve is nice, but one thing may now be apparent: your Christmas credit card bills have come due in February.

Christmas Buys Are Now Due 

Those sales leading up to Christmas meant that you saved a lot of money on your purchases as stores slashed prices in a bid to move inventory. For shoppers paying cash, huge savings were realized, perhaps the best deals for the entire year.

Pay Off Your Cards ASAP

If you charged your purchases, those big savings will disappear if you do not pay off your credit card balances immediately. Saving 20 or 30 percent on electronics, clothing, and personal goods is a treat, but if you stretch out your payments over several months, then the accumulated interest will wipe out those savings.

The tendency for some consumers when they receive their credit card bills post-holiday is to go into shock — too much spending and not enough money to pay everything off. The first thing to do is get past your shock and determine what you owe. Next, come up with a plan to pay off the balances, even if you don’t have the means to pay it off all at once. Spreading repayment over several months can help you wipe out holiday debt and cutting other expenses can help you do that faster.

Coming Up With A Plan

Besides cutting other expenses, you can gain control of your finances now by instituting the following measures:

Stop spending — Don’t add to your credit card balances. Instead, only pay cash for new purchases. Nip the problem in the bud now and you’ll gain control of your debt quickly.

Save money — Christmas club plans have just about vanished at banks across the US. However, you can authorize your bank to automatically withdraw $5, $10 or $20 weekly from your checking account and deposit those funds in a special savings account. Come next October, those monies will be available to you and you won’t need to use your credit card for next Christmas’ purchases.

Tap your home’s equity — Not recommended by many financial advisors, but still an option open to you is to take equity out of your home to pay off your debt. You can get a low rate loan and pay those monies back over a longer period of time, but there is a catch — if you default on the loan, you could risk losing your home.

Christmas debt can easily overwhelm Christmas memories by adding stress to your life months after the tree has been taken down. Take command of your finances now and come up with a plan that works best for you.  Come next Christmas, you can reap the rewards of your diligence and enjoy the holiday without worrying how you will pay for everything later on.