After taking a few days off, I want to discuss some of the problems and situations I encounter on an everyday basis as a non-profit credit counselor. In general, there are two types of individuals who seek out my services: the extremely poor who are in a relatively large amount of debt and the middle class who have leveraged themselves into a whole world of debt.
In the former group, most individuals have accumulated around $2,500 of debt that increases monthly as they fall behind on their credit card, rent, and car payments. Since credit cards are the most lax about payments, allowing you to pay a minimum rather than the entire balance, this is generally where I see this group of people fall behind. And as they pay interest rates in the high teens, falling behind for only a few months can add up quickly.
To remedy this situation, I typically teach individuals to be more responsible by giving them certain texts and pamphlets in addition to one-on-one counseling. I also advise them to refinance an asset or get a bank loan with a lower interest rate than their credit card so they can pay off their debts and start anew. As an excellent short term option, most individuals will be able to save a relatively large amount of money from the lower interest payments.
For those in the middle class earning around $120,000 annually, the problems are essentially the same as those earning less except the debts are on a much larger scale. Luxury cars, interest-only mortgages, private schools for the kids, and an overwhelming credit card balance can easily lead to a $40,000 debt, which gradually accumulates on a few credit cards as cars and other monthly bills are never truly paid off.
To help these people that are swimming in debt, I also offer one-on-one counseling where we discuss which assets can be refinanced, such as a car or a home. Another possible solution for many individuals is to look into a tax-deductible HELOC (Home Equity Line of Credit) with a much lower interest payment than their credit cards. Although may of these problems can be solved by paying off high interest debts and using a little creative refinancing, education is essential to making sure that this issue does not arise again.
If you feel like you are treading water or sinking in debt, consult a credit counselor to discuss your options and gain some valuable insight into your overall financial situation. It is one meeting that could not only turn your credit situation around, but also your entire life.