By Michelle Petrowski, CFP
Credit card debt can pile up for a variety of reasons, and for the most part, it can be a source of shame and embarrassment. It’s certainly not something that many people would be eager to discuss with their financial advisor, friends, or family. But when you do, be careful! Everyone has great advice when asked for, and sometimes the advice never seems to end, even when it is not asked for. You will hear from those who have used a personal loan, a debt consolidation loan, a HELOC on their home, balance transfers to 0% credit cards, a 401K loan, a method debt repayment plan. snowball and maybe even a debt relief company, to name a few.
Nonprofit Debt Management Credit Counseling Companies
There are many options, with pros and cons. The one I really like, for many reasons, is the debt management company run by a nonprofit consumer credit counseling agency. I speak from personal experience. Ten years ago, because of my divorce, I had accumulated significant credit card debt for attorney fees and divorce costs. This is the path I have chosen.
It’s embarrassing to say. But I had used up all my savings and it was the best option for me and my family. I didn’t want to touch my retirement accounts.
If you don’t know them, a debt management company works with your creditors to restructure your debt by creating a Debt Management Plan (DMP) tailored to your unique situation to help you pay off debt fast. For a fee, these companies negotiate lower interest rates with your creditors and consolidate your unsecured debt into one monthly payment. This simplifies the repayment process without you having to go into arrears, without any derogatory event on your credit report (unless of course you’re already in arrears), and you know exactly when the debt will be repaid. This can be stress relief for sure: one payment, one end date, and a lower interest rate.
Yes, you should be prepared to close these accounts, but no one will know that you are enrolled in any of these programs by looking at your credit report. Be aware that credit scoring models use various measures related to credit age when calculating your score, including the average age of your accounts, the age of your oldest account, and the length of time since you have opened an account. Thus, closing accounts will impact the length of your account history, which could potentially impact your score if you close an account that has been open for a long time. But for me, in my situation, the benefit outweighed the small impact it had on my score.
What is a for-profit debt relief business?
There are other debt relief companies that seem to follow a similar process, but they are “for profit”. They almost always require you to be past due on your accounts (and for several months in some cases) so that they can negotiate a lower interest rate on your behalf and their fees are usually higher – remember they are “for profit”. In addition, “becoming past due” on your obligations to enter one of these programs will certainly have a negative impact on your score, much more than closing a checking account.
Find an agency
Are you looking for a debt management company? You can try the Financial Counseling Association of America, (800) 450-1794, or the National Foundation for Credit Counseling, (800) 388-2227. You can also consult any debt relief service with your state attorney general and local consumer protection agency before deciding to do business with them.
Finally, personally, I don’t know anything about the companies named in these articles, but Forbes and NerdWallet recently published articles that might provide additional information and direction for any research on this topic, as well as the Federal Trade article. Commission (FTC). “Facing Debt”.
Remember, do your homework. Everyone’s situation is different! What worked for me, your neighbor, or a member of your family may not mean anything to you.
About the author: Michelle Petrowski, CFP®, CDFA®
Michelle Petrowski, CFP®, CDFA® (formerly Michelle Buonincontri), is a financial planner, wealth manager, divorce financial strategist and personal finance coach. She is the founder of Being in Abundance and Being Mindful in Divorce. Michelle has been featured on CNBC, Forbes, MarketWatch, Investment News, Yahoo Finance, and other media. You can email her at [email protected] or schedule a Q&A call with her here.
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