So you’ve actually decided to stop hoping that your debt will just go away and actually do something about it. Congratulations. If you kept turning a blind eye to your debt problems it would’ve eventually led to lawsuits, wage garnishment or even bankruptcy.
However, just because you’ve decided to finally take care of mistakes from the past, doesn’t necessarily mean that it’s all smooth sailing from now on. You need to formulate a plan, stick to it and avoid the most common mistakes of debt relief.
Mistake #1: Choosing the Wrong Type of Debt Relief
There’s debt consolidation, credit counseling, debt settlement … and trust me, they’re all different. You need to understand how each one is trying to get you out of debt if you plan on succeeding.
Debt Consolidation – You take out a loan to pay off your debts now with one low monthly payment. The problem is that you end up paying more over time because of the length of the loan and you’re not helping repair your credit. As a result, you won’t be able to apply for a credit card or loan for several years.
Credit Counseling – This is a somewhat beneficial service if you qualify. The truth is that most people are considered “too far gone” for credit counseling and are advised that bankruptcy is their only option. Since this is a service that’s largely funded by the credit card companies, they deal exclusively with credit card debt. If you have medical bills, mortgage problems, personal loans, or anything that’s not credit card debt, then credit counseling probably isn’t for you.
Debt Settlement – Here you’ll try to negotiate with creditors and collection agencies to get the best settlement offer possible. However companies go about it in two ways. The first, where you put money into an account and stop paying creditors altogether is harmful to your credit and isn’t guaranteed to work.
The second option is where a debt settlement company focuses on your debts one at a time, which generally yields better results. You can concentrate on the more important debts and even try to have your creditors agree to remove the account from your credit reports. Not only are you paying off your debts, but you’re potentially boosting your credit score as well. If you can find a debt settlement company that charge about 5% of your total debt you’ll know that 95% of the money you’re spending is actually going to pay off your outstanding debts.
Mistake #2: Closing Out Open Cards
I know that the credit cards are probably what got you into trouble in the first place and I certainly don’t think you should be using them during your debt relief process. But closing out good accounts is a double whammy.
For starters, you lose any leverage you may have with the credit card company that you’re paying off. If you’re not a customer they have no reason to go out of their way to help you. It may not seem like they not doing that anyway, but if you cancel the card, their tone will be much frostier.
On top of that, closing your card may destroy your credit profile. A large part of your credit score is made up of how long you’ve had open lines of credit. Closing an older account can significantly hurt the average time that you’ve had good credit available to you.
Mistake #3: Giving Up Your Bank Information
Creditors and collection agencies are undoubtedly going to ask for your bank information, telling you that it’s a “convenience.” They’ll explain that they’ll automatically deduct what you owe them each month; “you’ll never even have to think about it.” Don’t do it.
You can make your payments through your bank’s automatic bill pay program, use you the bank’s online payment methods, or even send a check. But DO NOT agree to set up automatic payments where you give out your own bank information. It gives them more leeway than you’ll want them to have when it comes to your bank accounts.
Mistake #4: Not Sticking to Your Plan
This is the major reason that people fail when it comes to debt relief. Whatever type of debt relief you decided on, and whatever the strategy was to get rid of your debt, stick to it. If you keep flip-flopping on how it’s going to be done, you’ll probably never accomplish anything.
If you decide to use a company for your debt relief needs, research them with the Better Business Bureau and make sure they’re rated an “A.” Discuss your situation in detail with them and don’t blindly agree to what they think is right. They may have the experience, but this is ultimately your problem. Listen to their suggestions, mull it over and then make the decision that’s best for you.
