If you didn’t already know it – debt management is a huge growth industry. There are more of us experiencing debt, and there are more of us who are experiencing the pain of repaying that debt. As with all growth industries though, there are some who are involved in debt management who have less scruples than others do. For this reason, it is always helpful to keep one eye open for some of the pitfalls you may come across in debt management.
Pitfalls of using a credit/debt counseling service in debt management
It should be stated at the outset that most credit/debt counseling services are reputable. However, there are those who make their living help to manage the debt of defaulting debtors – and they do little to “help”. As such, if you are thinking of seeking the assistance of a credit/debt counseling service, keep in mind the following:
- Always try to use a non-profit credit/debt counseling service.
- Make sure the credit/debt counseling service is registered.
- Check that the debt being managed by your credit/debt counselor really needs to be managed. The reason you need to do this is because most credit/debt counselors who are not non-profit will charge you a commission and monthly fee on the overall debt being managed; therefore they have an incentive to boost your total managed debt amount.
- Make sure that your credit/debt counselor is working in your interests, not your creditors; for example, have they tried to obtain a reduction (sometime known as “haircut”) on your interest rate and outstanding interest repayment amount?
Pitfalls when doing your own debt management
If you decide to manage your own debt, rather than using the services of a credit/debt counselor, make sure that you keep an eye on the following:
- You are not paying any hidden fees for restructuring your debt or making early repayment of your debt;
- That the overall Annual Percentage Rate of the interest repayment is less than you already pay;
- That any security you provide is not going to be lost.
- Where you consolidate debt, that by putting all your eggs in one basket you are not giving your new creditor complete power over your financial affairs; for example, what happens if they call-in the refinanced loan? If you have lots of creditors, it could be harder for your creditors to achieve this.
- That your overall total repayment amount is not going to be significantly higher than if you continue paying the debt now – albeit in areas. This should be carefully reviewed even if your monthly repayments are significantly less. For example, if you now pay £1,000 per month for 1 year, you’ll end up repaying less than if you have to pay £500 per month for 3 years. Although the second system may sound more attractive when looking at bottom line, when you consider the total period you have not actually done yourself any favors.
Whatever you decide to do, please make sure that you have at least one conversation with your local consumer affairs bureau before you embark on your debt management program to get some guidelines of whether or not you are doing the right thing.