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Credit Card Debt Rises Yet Again, Personal Bankruptcy Matches Pattern of Federal Spending

By Reliefdebt Subscribe to RSS | December 9th 2011 | Views:

The federal government isn't the only entity in today's economy that finds itself with a significant debt burden. The average credit card debt for households who have credit card debt is nearly $16,000, according to the Federal Reserve Bank of Boston. For many of these people, credit card interest payments alone gobble up a large portion of their household budget. For some people, debt counseling can be a lifeline that allows consumers to both eliminate their debt and to avoid bankruptcy. By helping people lump multiple obligations into one affordable monthly payment, debt counseling companies help consumers to eliminate their debt problems permanently.

Consumers may try a number of different strategies to get themselves out of debt. To consolidate debts, consumers may take out home equity loans or home equity lines of credit. Consumers may also consider transferring balances to zero-interest credit cards. Another strategy is to take out a personal loan to consolidate debt at a lower interest rate.

Each of these strategies has consequences. Putting home equity on the line for credit card debt means that home equity is not available if a major home remodel or repair is needed. Also, if borrowers default on the home equity loan or HELOC, then they may lose their homes. Zero-interest credit cards will immediately hike up interest rates to exorbitant levels if consumers submit even a single late payment. Personal loan interest rates are high, and statistics suggest that 70 percent of people who take out personal loans to consolidate debt end up with the same amount of debt or more just two years later.

Most programs start with an initial phone call. With a counselor, borrowers review all outstanding credit obligations and also their household budgets. Then, after deciding what an affordable monthly payment will be, the counselor calls each creditor to make payment arrangements. In some cases, counselors can convince creditors to settle for less than they are owed. For an agreed-upon period of time, the consumer pays a lump sum to the debt counselor's company. The company holds the money in trust until the borrower has paid back the full amount owed to creditors. When the full amount is paid, the company releases the money to creditors who then discharge the debt.

Going through credit counseling will affect a borrower's credit score because the process will be classified as a debt settlement. The settlement will stay on the credit report for seven to ten years and may limit access to credit during that time. However, a settlement does not lower the credit score as much as a bankruptcy. Also, people get to keep their valuable assets instead of having them sold to pay creditors, which is what happens when a person files for certain types of bankruptcy.

The counseling process starts by contacting a company. The National Foundation for Credit Counseling is a reputable organization that lists nonprofit member agencies in most geographic areas. Consumers can find a qualified agency by going through this organization. Many companies provide services in-person, over the phone or over the internet. Many companies also provide financial management classes to help customers to get on their feet.

Consumers may have to stop using credit cards altogether during the consolidation process. This means that consumers will have to learn to spend according to their means. Writing down spending and drawing up a budget will help consumers to keep spending on track. Good financial discipline acquired during the counseling process will translate to good financial decisions over the long term.

Even though going through credit counseling may seem intimidating, the process can be the first step toward regaining financial health. For consumers who are drowning in credit card debt, counseling will provide a way forward without forcing consumers to go through bankruptcy. For a fresh financial start, consumers should contact a debt counseling company today.

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