Debt Counseling

People who get themselves into financial trouble will often seek assistance through debt counseling. That can definitely be a wise move.

A skilled counselor can offer specialized knowledge gained through experience about which financial solutions are effective and which are not. Beyond practical guidance, one of the best values a good debt counselor has to offer is that helping hand.

Incurring excessive debt over a long period is often more a psychological issue than one of practical skill. Difficulty resisting a debt settlement plan that looks too good to be true is hard for some people. A third party's debt counseling can be an objective eye. People deep in debt sometimes have trouble seeing the light at the end of the tunnel. In the midst of a financial crisis, it can be hard to focus on the long term - especially when willpower may be the one weak area that led to accumulating all that debt in the first place.

Debt counseling can help keep such a person's eyes focused on the prize. Helping to develop a workable program is as much about setting realistic goals, and providing incentives and reminders of the worth of sticking to them, as it is about numbers in a spreadsheet.

But debt counseling can be a hindrance if the person isn't prepared to commit to resolving his or her problem. Relying on just one more crutch to avoid accepting responsibility isn't an effective long term strategy. Short term help, for a period of readjustment, is perfectly healthy, but in the long run, it's up to each individual to manage his or her own affairs.

Many people are not naturally good at managing money. But it's a skill that can be learned. Balancing a checkbook requires only simple arithmetic or minor skill with a calculator. More often, the difficulty isn't technical, it's emotional.

Good advice is only worthwhile if it's followed. No debt counseling can ensure that. It can make a program sensible, and therefore feasible. But a person has to be willing to follow a sensible strategy and that often means changing long standing self-destructive habits. That comes harder to some than others.

When a person is willing to follow good debt counseling advice, and also willing to strengthen their own inner reserves, the financial recovery may be long, but it is sure.

Outlining a realistic program for consolidation, debt forgiveness, interest rate or loan terms renegotiation is just one of the practical benefits a counselor can offer.

Helping keep you on track is part of the total package. But, ultimately it's up to each person to recognize their actual situation and meet it bravely. The first step to handling any problem, and excessive debt is no exception, is to focus on facts. Here, that means finding out how much you actually owe and what the monthly payments and interest costs.

It's surprising, though maybe it shouldn't be, how many people that are troubled by debt problems, don't actually know how much monthly interest they're paying. Part of the problem may be that they really don't want to know. Considering how much it sometimes is, one can hardly blame them.

But the first step back to financial health is a good diagnosis. If you're paying $200 per month in interest charges alone on a monthly net income, say, of $4,000, then you are paying 5% PER MONTH of your income for essentially nothing. It's not entirely nothing, since you are enjoying the things you bought early. You would have had to save to purchase them outright. But is that worth 5% of your income?

When that $200 a month (and for many, it's much more) becomes the total you can pay each month, you have reached a point where you will never pay off the debt. If all the money is going to interest none is going to principal. That may be an extreme case, but consider how much of the monthly payment in your circumstances goes for interest versus repayment of principal.

Suppose it's 90% interest, 10% principal. That's approximately the case for the average home loan for the first several years. You can use an online calculator to see how long that will take in your situation.

Suppose, for example, you owe $10,000 at 7%. You could pay only $116 per month, but it would take you 10 years to pay it off. The interest would cost you $3,933 - almost 40% of the total amount.

Now that you've seen your situation, you need to take two further steps. Develop a budget that will allow you to make payments as large as you can handle to get the bills paid off. You could use the 'snowball method' and pay off the smallest one first. Then apply what you were paying to the smallest to the next smallest (now the smallest), until you've reached the end.

Alternatively you could pay down the largest bill. That would save you the most in interest charges, but it's hard for many people to stick to it, when they see such slow progress.

Now, for the hardest - and most important - step (which should be carried out simultaneously with the first): stop borrowing. You should not allow yourself to incur any further debt until you have paid the first down to a reasonable level. That level is zero for credit card junkies. For others, it may be in the 5% range. For some with good willpower and are willing to eat the overhead, 20% is the maximum.

Facing reality and making a commitment to long-term change are the two hardest things for anyone who has entered financially turbulent waters to do. But they are the bare minimum required, if you want to recover your financial health and independence.

Credit Repair from Debt Counseling