As Natasha mentioned last week, I suggested they see a credit counselor. I thought it would be a good idea to give a quick overview here of what a credit counselor does — and doesn't do.
Generally, if you're having problems with your credit card debt, a credit counselor will evaluate your income, your living expenses, and will provide you with options for paying off your credit card debt. However, this does not include student loans or auto loans.
Sometimes it requires entering a Debt Management Program, where you'd pay one monthly payment to the credit counselor agency, and then they would make payments to your creditors. Many creditors will reduce your interest rate so you can pay off your debt within 5 years, but they'll also close your account and charge a monthly service fee. If you're in a Debt Management Program, while you're paying off your debt, the account closing won't adversely impact your credit score. In fact, your credit score should improve as long as you keep making payments on time.
It's important to know that Debt Management is not the same as Debt Settlement. If you've seen those t.v. commercials that promise to pay off your debt for pennies on the dollar — that's Debt Settlement. Basically, you are negotiating a discounted lump sum to pay off a debt. Usually, the people who go with Debt Settlement have run out of options — they are hardship cases, and their credit card payments are seriously delinquent. But this solution is often not that simple: your credit score will probably take a heavier hit, and unfortunately, scams are all too frequent.
I am hoping that by having Natasha and Zak speak with a reputable credit counselor, they can understand their options, and maybe come up with a lower monthly payment and a clear idea of how long it will take to get out of credit card debt without further significantly hurting their credit score. I also hope addressing this issue head on provides peace of mind and allows us to focus on the spending adjustments we will strive for over the next few months.