Credit Card Debt Management

Stimulus checks should be rolling in any day now, and those with direct deposit may even have them already. Of course, $600 isn’t a lot of money, but it’s probably the largest amount of free money you’ve received lately (and of course, skeptics would frown upon referring to the stimulus checks as “free money,” because we’ll probably pay for it in the future).

At any rate, a recent article in the local paper suggested more people are using these checks for necessities like food and gas (imagine that). Some are blowing them on “want” items like fish aquariums, vacations, etc. But here’s an idea — what if, instead of stimulating the economy with our stimulus checks, we stimulated our own budgets by paying down debt? Again, $600 may not go far, but if you can use it to eliminate or significantly reduce even one debt, you could open up a little breathing room in your budget.

Of course, there’s a good chance that your debtor will try to apply your extra payment toward future interest. This means your monthly bill for the next several months could be surprisingly low, as little as $0. Instead, apply the payment on the principal amount and then try to continue making monthly minimum payments, plus a little extra toward the principal, if possible. And quit using the card until you are able to pay off the balance each month!

It’s not every day you get free money, so put this to good use and really make it count. That way, six months down the road, you won’t be scratching your head and wondering where it went. The effects of paying down debt will be seen and felt well into the future.

Let’s face it. There are some times when credit counseling is necessary. However, there are plenty of other stories out there of people being swindled blind by fraudulent companies seeking to “help” people out of their debt prison. After all, it’s a $7 billion industry that is virtually unregulated, and that means jackpot for a fast-talking schemester. The following are some signs to watch out for if you must sign up with a credit counseling service:

Hefty fees upfront: There should be no downpayment. There should be no earnest money. There should be no fees beyond about $10, unless the service goes above and beyond helping you settle your debt. For instance, financial counseling and budget restructuring.

No accreditation: Trustworthy services should be accredited by the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

Missing/late payments: Some companies keep a one-month payment as a fee, even though you expected them to give that money to your creditors. Find out the details of how much of your money is going toward your creditors and lenders each month and when it will be sent to them. Then, follow up on that and make sure it happens. Ideally, just hire a debt reduction service that helps negotiate lower interest rates, but leaves the mailing of payments up to you.

Exaggerated claims: If you hear claims that your debt can be settled for little or no money without hurting your FICO score, beware! Credit counseling services are supposed to help you pay your debts off, but they will help you negotiate the interest rate with your lenders. They will be honest and upfront with you regarding the fact that using this service can indeed affect your credit score, which in turn affects your ability to secure loans and credit in the future.

Technically, credit counseling indicates a company that is trying to help consumers repay debt through careful management of financial resources and a change in past financial habits. However, the term has become practically interchangeable over the years with phrases like “debt reduction” or “debt consolidation.” The lines between these three very different services have been blurred into one big $7 billion industry that sometimes puts the consumer first, and sometimes not (depending on who you’re dealing with).

First of all, let’s clear up these misnomers. Debt reduction negotiates on behalf of the consumer to settle debts for one lump sum or at least reduce monthly payments. Debt consolidation, on the other hand, takes the money from the consumer and physically sends it to the creditors and lenders - keeping a chunk as a service fee, of course. The heftiness of that chunk varies greatly, and both of these services may or may not include education on responsible management of finances and credit. There are many unscrupulous agencies out there offering this “service,” but the warning signs are going to be another topic for another day.

The pros of using these services include:

-The legitimate ones can truly help repair your credit.

-It’s better than bankruptcy.

-Your interest rates or monthly principal payments might be reduced.

The cons of using these services include: