Hiring a Debt Management Service

Do you feel like you can’t keep paying all your bills on time?  Are you “over your head,” spending more each month on bills then what you take in?  Well, you might be a good candidate for a debt management service, a program usually available through a credit counselor.

What exactly is debt management?

A debt management program, or debt management service, basically acts as a middle man between you and your creditors, the people you owe money to.  Instead of paying numerous different creditors every month, you would instead send one big payment into the debt management company and they pay your creditors on your behalf.  They do this for a small commission, usually a percentage of your monthly payment.

Debt management is normally only good for unsecured debts, like credit cards.  If you have debts like home mortgages or car loans, debt management may not provide you with much benefit.

What effect does debt management have on my credit?

One of the benefits of debt management programs is that they may be able to reduce some of your unsecured debts’ interest rates and/or balances.  However, this will most likely have a negative effect on your credit report as it will show future creditors that you are a higher risk.  To keep it into perspective though, debt management programs normally have a far less negative impact on your credit when compared to a long history of late and missed payment if you choose not to enter a debt management program.

Profit vs. Non-Profit Debt Management Services

When many private, for-profit debt management services started appearing in large numbers in the late nineties and early 2000s to market to those in debt, many financial professionals advised people to obtain help from nonprofit debt management companies.  The logic behind that is that those offering for-profit services charged larger commission rates than those non-profit companies.

Unfortunately, this is no longer the case.  Many very much for-profit companies now call themselves “non-profit” — nothing more than a marketing term.  There is a huge different than a charitable organization and those that claim to operate as a “non-profit.”  So, before you go shopping around for a debt management company, know that non-profit doesn’t necessarily mean cheaper and better intended.

Dave Ramsey Bio

Dave (David) Ramsey is one of the most popular financial “gurus” in America.  While many know him from either his radio show and/or books like Financial Peace and The Total Money Makeover, he is also a television personality as he hosts The Dave Ramsey Show on the FOX Business Network nightly.

His flagship radio program, The Dave Ramsey Show, is syndicated throughout several hundred radio stations in the United States and Canada, including Sirius and XM satellite radio.  Three out of the 14 books that he has written on personal finances have been on The New York Times Best Seller list.  Whether over radio waves or through television, in writing or in person, Dave Ramsey dishes out his distain for credit cards, his recommendation on paying for cars in cash, and the importance of savings to millions every day.

Dave Ramsey also talks to the public in a variety of venues around the United States about issues pertaining to personal finances — some of these venues being churches.  Dave Ramsey is a Christian and his literature, in addition to his radio/television shows, have a Christian perspective to them.

A background on Dave Ramsey

Dave Ramsey received a BS degree with double majors from the University of Tennessee in 1982:  Finance and Real Estate.  By the age of 26, he and Ramsey Investments, Inc had a portfolio of more than $4 million — some if not most only obtainable by getting into debt.  Shortly afterward with the passing of the Tax Reform Act of 1986 and other circumstances, Dave Ramsey was forced to file for bankruptcy.

After going through bankruptcy, Dave Ramsey vowed to never borrow money again.  Once he recovered his financial footing and helped a few friends do the same, Ramsey began counseling couples on their personal finances at his local church.  In 1992, following the recommendations of some of the people that he had helped, he wrote his first book:  Financial Peace.

Loans at Department Stores

Everyone has an answer for why we’re in this “credit crunch, financial meltdown, insert buzzword, etc.”  Turn on any cable news channel, or even the local news, and in between the car commercials you’ll find experts trading their theories for air time and a plug.  Experts, economists that have attended college longer than I’ve been alive, telling us why the economy is doing so terrible.

Depending on their slant/bias, the reasons will be:

Consumers - “Consumers shouldn’t have taken credit that was easily available to them.  They wanted a Lexus, but could only afford a Kia, and are forcing financial institutions that were just trying to make a buck into bankruptcy.”

Companies - “People are honest, hardworking folks.  It’s those greedy corporations and fat cats up North that prey on us.  Most people work 23 hours a day and don’t have the time to read contracts or understand what they’re signing.”

Government - “BUSH DID THIS!  People need to elect McCain/Obama/Santa Claus in November to raise employment, fix the economy, and make America great again.”

Big picture aside, generally speaking people have less money, work longer hours (if they can find a job), save less, and are much more concerned about their financial situation than they were 5 years ago.  Why do you think we’re in the situation we’re currently in?  Do you subscribe to one of those agendas above?

Dislike Bush?  Think John Q Public is stupid?  Greedy companies?

I have my own “quotes” on the topic.  It’s a conversation I witnessed.  It took place about 2 years ago at a major department store while I was checking out at the cash register with my wife.  Now that I think about it, it was the last time I went shopping with my wife.

Cashier (to customer in front of us): “Hi, did you find everything alright?”
Customer checking out: “Yes ma’am, I just needed these socks for my husband.”
Cashier: “What would our husbands do without us? (laughter)”
Customer: “Yeah, darlin’. (laughter)”
Cashier: “Your total is $6.53.  Honey, did you want to go ahead and sign up for STORE’s credit card today, you can save an additional 15% on your purchase?”
Customer: “I tried signing up for ANOTHER STORE’s credit card the other day, they said I was declined.  I might as well try my luck with you guys, too.  Why not?”

A credit card — financial contract — loan — was offered to a lady that bought socks.  On the other hand, the lady wanted to give it a try.  After all, that 29% APR on that store credit card would’ve saved her $1.

I blame the socks:  the solution.

Paying Debts with Loans

Getting out of debt is a common goal of many people. One solution that many people use to get out of debt is to obtain a loan to pay off debts.

How it Works

When you use a loan to pay off your debts, you must first obtain a loan large enough to cover the total amount of your debt. If you have credit card debt that totals $4,000 you need to obtain a $4,000 loan. Once you have received the loan, you then disburse payments to each of your creditors. Your credit card debts are paid off and you now make a single monthly payment your lender.

Benefits

Perhaps the most noticeable benefit that you receive from using a loan to pay off your credit card debit is that you no longer have to be hounded by creditors. If you were behind on your credit card payments, you are now caught up. The harassing phone calls will stop as soon as the creditors receive your payment.

Another benefit of using a loan to pay off credit card debt is that you now make a single monthly payment towards your debt rather than several payments. Consolidating your debt in this way makes it easier to budget and manage your money each month.

Depending on the interest rate for your loan, it could be less costly to repay the loan than it would be to repay your credit card debts. This lower cost gives you additional freedom in spending your money.

Drawbacks

You must keep in mind that using a loan to pay off your credit card debt is not reducing your debt loan. Instead, you are only reshuffling the debt in a manner that makes it easier to manage.

If you have been late on your credit card payments, your credit may be negatively affected. This will have an effect on your ability to obtain a loan. If you are more than thirty days late on a single credit card payment, you face the risk of being denied for the loan.

Unless the loan interest rate is lower the lowest interest rate of your credit card, using it to repay your debts isn’t worth it from a financial standpoint.

Several factors come into play when you make the decision to repay your credit card debt using a loan. You must evaluate each of these factors according to your situation to make the best decision.

Good vs. Bad Debt

When you look at your bills each month, you may feel overwhelmed by the amount of money that you’re spending on debt. Sometimes debt might seem like a trap that you only want to fight your way out of, but not all debt is bad.

When a lender looks at your credit report to see what kinds of accounts you have, they will look at some debts more favorably than others. If you’re focusing on getting out of debt, you need to know which debts are considered bad and which are considered good.

Some Debt is Good

Some kinds of debt are actually investments. It might sound preposterous, but it’s true. If you used debt to finance something whose value will appreciate or contribute to your financial health, then you’ve incurred good debt.

What are some examples of good debt? A student loan borrowed to finance education. It’s been proven that people with college degrees make more money over their lifetimes, so a student loan is an investment in yourself. A mortgage loan used to purchase a home is good debt since homes typically appreciate in value.

And Some Debt Is Bad

Now you know there’s good debt. You can incur bad debt too. Anytime you accumulate debt to pay for something that can be consumed, the debt it bad. Once you’ve consumed the item, there’s no value in it, yet you’re left with debt to pay for something you no longer have. Bad debt is financially unhealthy.

Because of the things that credit cards are used to purchase, credit card debt is often bad debt. When you use credit cards to purchase everyday items that you will use or that will depreciate in value soon after they’re purchased, you have accumulated bad debt.

Auto loans, by definition, are bad debt, because the car will depreciate in value as soon as you drive it off the lot. Even though transportation might be a necessity, the auto loan is still bad debt.

To maintain your financial health, you must make sure that you don’t accumulate too much debt, whether it’s good debt or bad debt. It is possible to become overloaded with debt, even good debt, to the point that you struggle to make ends meet.

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