When people go into deep debt, they often think that the only solution to the problem is to simply get a bankruptcy and start over again. Bankruptcies, though, aren’t exactly “starting” over—they stay on your credit record for years and also make you look bad to potential lenders. So what are you supposed to do if you’ve got deep debt? You could take the bankruptcy route and damage your credit more or you could do something else that will allow you to get out of debt while not further harming your credit: credit counseling.

What is Credit Counseling?

Credit counseling is essentially debt counseling. When you get into a lot of debt and are unable to pay it off on your own, you’ll go to a credit counselor who will tell you the best method of paying off the debt. Credit counseling gives you an effective way of paying off whatever credit card debt you may have.

When should I consider Credit Counseling?

Anyone who has debt which they cannot pay off should consider credit counseling. Credit counseling offers you a way out of the mess of credit card debt. Qualified and experienced credit counselors can look at your debt and determine the best way of paying it off. Depending on how much debt you have, your counselor may tell you about a debt reduction plan to help rid yourself of the debt.

What is a Debt Reduction Plan?

Under a debt reduction plan, your counselor will consolidate all your debts into one monthly payment which you give to the counselor who then disperses it to creditors. Your counselor will also attempt to lower your interest rates and will arrange payments to each creditor in a way that enables you to pay off the debt as quickly as possible. Most debt reduction plans last anywhere from 12-60 months, although people with a huge amount of debt ($30,000 or greater) may end up in a debt reduction plan of longer than 5 months. How long your debt reduction plan lasts will entirely depend on how much you can afford to set aside for your bills each month and how much debt you have.

Why is Credit Counseling Effective?

Credit counseling is effective because those who work as credit counselors are able to financially analyze any situation and tell the person who is in debt what the best option is for them in regards to paying off the debt. They are able to create individualized plans for anyone who is debt.

Why is Credit Counseling NOT Effective?

Generally speaking, most credit counseling is effective. However, if you go to a credit counseling agency that is unaccredited and dishonest, you will run into big problems. In fact, you may even be worse off than before. That’s why picking the right credit counseling agency is extremely important.

How do I pick the right Credit Counselor?

The first step toward selecting a credit counselor is to open your phone book. Look for the section of the yellow pages about “Credit counseling”.

Take a look at each listing—there should be at least one local credit counseling agency in your area. As you look at each listing, make note of the name of the counseling agency.

After you’ve come up with a list of agencies, log on to Google.com and google each agency. Really research each agency so that you do not end up with one that isn’t effective. You may want to check out http://www.nfcc.org/ for a list of accredited credit counseling agencies. Those agencies that are accredited are usually the most effective ones.

Questions to Ask a Credit Counselor

Once you narrow the list down to potential suitors, you’ll still have some work to do before you can pick a good credit counselor. Each agency that you may consider should offer a free session. Take advantage of this session to ask the counselor some of the following questions:

• What fees are associated with using this counseling agency to get out of debt? While virtually every counseling agency is non-profit, they will still all charge some fees to help cover administrative costs. Generally speaking, you will not want to choose an agency that charges more than $50 a month for their services.
• How will you tackle my debt?
• Will you employ a debt reduction plan?
• Will I have to pay any extra fees?
• It’s important to know how a perspective counselor will help you to get rid of your debt before you even sign up with them.
• How long will the plan take? In other words, how long will it take for me to pay off all this debt? Time is money, and if you’re looking to pay off your debt in a specific amount of time, perhaps a year or two, it’s important to ask how long it will take you to pay off the debt using this credit counseling agency.
• Are you accredited? It’s a legitimate question that you should ask every single perspective credit counselor. Good, accredited counselors will not mind this question. Those who aren’t will mind the question, and that’s a good indication that they are not right for you.
• Will you tailor your plan to fit my unique needs? Everyone’s situation is different and good credit counselors will take all of your needs into consideration when coming up with a plan. Make sure that the credit counselor that you are considering will be able to tailor fit a plan to you.
• Can I meet with you once a year to discuss my debt and how much I’ve paid off?

It’s important to stay updated when it comes to using credit counseling. Most credit counseling agencies will encourage meeting up with their clients once or twice a year to discuss details of the plan and how well it is working. They will also review your credit report with you.

Recommended Credit Counseling Agencies

It is often very difficult for some people to find credit counseling agencies that are respectable and legitimate. While the agencies below may not have offices in your city, some offer online services that you may be able to use.

• GreenPath – GreenPath has offices in many states and cities. They’ve helped millions of people get out of debt and are accredited.

• Delray CC – Delray offers completely free credit counseling services to millions of people. They are accredited and can counsel via the internet or the phone.

• MoneyManagement – MoneyManagement offers services both online and in person at their many locations. There are some fees associated with MoneyManagement, but they are minimal. MoneManagement is fully accredited and very effective.

Keep in mind that these are just three of the many possible credit counseling agencies that you can use to get out of debt. Check the NFCC for more possible options.

By Michelle

Americans are going broke. That seems like a ridiculous statement to describe people who live in the richest country in the world. Unfortunately, the statement is pretty much true. A recent report revealed that Americans are now spending 1% more than they earn. The savings rate for Americans now sits at -1%, the worst savings rate in over 73 years.

While people once strived to save 10% of their earnings, most Americans now want to spend what they have and sometimes what they do not have. The reasons for why Americans are going broke vary. Some go broke due to overusing credit cards, while others struggle to make monthly mortgages or car payments. Others are involved in divorces that leave them with next to nothing. Still others cannot keep up with the cost of living, which has greatly increased over the past 30 years—while salaries haven’t quite kept up with the change. Some are laid off by their employers, as is the case with many auto workers.

Credit Cards Ruin Lives

Practically every adult American has had or currently has a credit card. It’s easy to see why—they offer Americans the chance to buy things that they might otherwise not be able to afford. While credit cards can be a great way of establishing credit, they can also be quite lethal for Americans.

I’ve seen this first hand with my parents, both of whom have racked up big debts on credit cards. They both charged gifts and other things, ranging from gasoline to groceries, on their credit cards without much thought. Pretty soon, they charged more than they could afford to pay back. As they stopped making monthly payments, the late charges started to pile up. Eventually, it got to the point where they had minimum payments from $200 on up for each credit card. Most Americans cannot afford to pour that much into bills. My parents couldn’t. They were able to get into a credit counselor, which allowed them to pay off the debts.

Pretty much the same thing happens to a lot of Americans. They charge a lot of things on their credit cards without much thought. The minimum payment for each card they use slowly increases. After a while, the minimum payment is too difficult to maintain. That’s when the late fees begin to accumulate on each credit card, thus increasing the minimum payment even more. When the late charges hit, the credit rating is hurt and some Americans are forced to file for bankruptcy.

Monthly Mortgages Become Too Much to Bare

Remember the mortgage you got a few years back? The rate was quite low and it seemed doable on your salary. But then the interest rate increased and so did the monthly payments. Homeowners could no longer afford the mortgage that was previously affordable.

This harsh reality has led to many home foreclosures in the United States. Instead of buying a home and staying in it, some Americans are forced to hop from house to house, trying to find a mortgage that they can afford.

The American dream is, of course, to be successful. The way to be successful is to live big by buying a house that sometimes can cost as much as $300,000. With expenses factored in, a mortgage of $1,000 a month is simply too much for many American families to afford. Expensive mortgages are yet another reason for why Americans are going broke.

Car Payments are Too Expensive

Some Americans who drive big trucks or expensive cars are paying $300-$500 a month in car payments. That’s not even with insurance, which can cost another $100-$300 a month. Gas prices have also been on the rise recently, so buying gasoline for the vehicle can cost another $100-$250 a month. All told, an average American family may be spending a $1,000 a month on transportation. That’s simply too much of a strain on their salary, and so many people resort to using credit cards to pay for car payments or gas. Once the cards are maxed out, there is no way to make monthly payments.

Divorces Hurt Finances

When a couple enters into marriage, the finances typically become joint between the couple. This may be good for the marriage, but once the marriage falls apart and the couple divorces, the financial situation worsens.

With the high cost of divorce attorneys and divorce court, many Americans emerge from their divorces with little to no money. This can cause financial ruin for a person, which may lead to bankruptcy or bad credit that will be difficult to repair.

The Cost of Living Has Increased While Many Salaries Have Stayed Constant

It’s a fact that the cost of living has greatly increased over the past 30 years. Many salaries have stayed the same or even decreased in some ways. Things like groceries, utilities and the bare essentials are becoming harder and harder for Americans to afford.

When Americans are not able to afford the necessities, they usually turn to loans or credit cards to cover costs. In the short term, this may be OK, but in the long run, it greatly hurts credit—especially if the person who borrows or charges is unable to pay back the money. It is, thus, another reason why many Americans are going broke.

Workers Lose Jobs

Since many people lack adequate savings, when they lose their job, the results can often be catastrophic. People who have lost their jobs are often unable to pay the bills once they have received their last check. While looking for a new job, they may be forced to take out loans or use credit cards in order to make ends meet. When their credit limit has been reached, they are left with huge stacks of bills. If they haven’t found another job by this point, they are stuck in financial ruin. The last resort for them is to file for bankruptcy.

What Can Be Done?

The only logical solution to the problem of Americans going broke is for Americans to simply realize that they must have certain priorities for their money. They must realize that they cannot live beyond their means, even if they want to.

Priority number 1 should be to provide the things necessary to live a decent life.

Priority number 2 should be to pay the rent and utilities.

Priority number 3 should be to save at least 10% of the salary.

Priority number 4 should be to buy things that may be luxuries—iPods, computers, big screen TVs etc. This should only be done if there is enough income to afford these things and only after all other bills and necessities have been paid for.

Unfortunately, many Americans put the fourth priority at the top of the list and live beyond their means, which is why America is going broke.