Column: Debt Isn’t the Problem; Spending Is

Be wary of credit counseling and debt consolidation

Much is made of credit counseling and debt consolidation. Often it seems that there are more advertisements on television, radio, newspapers and billboards for debt consolidators than advertisements for cars. Knowing that, be warned there is a lot of money in the industry, your money.

I preach, teach, coach, counsel, coddle, prod and push people regularly to clean up their financial lives as a primary method of lowering stress levels and providing for a more stable healthy future. Regularly, I am amazed at the level of debt many, particularly younger, gay men and women create, service and carry around.

When you are ready to address your debt, credit counseling in its pure form is a good thing. We’re doing it now. The goal of credit counseling is to help you better understand how credit works, what credit is for and when and how to use credit. This is not rocket science though there is a key point to keep in mind; in almost all cases credit counseling is a business. Big business; remember they can buy all those ads.

You got into financial trouble because you didn’t plan well and spent poorly. You have to figure that the business to which you give your money to help you out of your mire will require money to operate, pay your counselor, return the owners on their investment and make a profit. Before you spend one more dollar of your money, make certain the organization you’re ‘hiring’ to unravel your financial mess will not simply drag you deeper into it. Be certain you will realize tangible benefits for your spending.

Some gay men and lesbians need a helping hand making big changes in their life, and some hand holding along the way. If you’re one, you are a customer for a credit counselor. If you insist on going forward with a credit counselor, check out their Better Business Bureau report. Research them on the Internet. Ask for references of those who they have helped. Know up front what the total cost to you will be, and what exactly will be done for you and when. It’s your responsibility to perform due diligence upfront, before you sign up. Ask as many questions, and ask for as much proof of the answers, as you want.

The goal is for you to avoid the credit counselor all together. After all, if debt reduction is your goal there is no need to incur an additional expense to reach it. And, if you are so lucky as to find someone who can truly accomplish the task of straightening out your financial mess, you will not have learned anything and will probably find yourself right back in the same place before you know it. The decision to hire a credit counselor is one I highly caution you against, and if you insist it is the right route for you, take the time to really do your homework before signing up.

Debt consolidation is an even more dangerous business. Once done it can deliver the erroneous impression that you have resolved your financial problems. The bill collectors have stopped calling, the late notices have stopped arriving and you exhale a great sigh of relief. What debt consolidation usually means is that you have swept your spending problems under the rug and gone about your life creating new debt. Unless you experience the process of paying off your debt, you are unlikely to create new spending habits that will keep you from spending your way back into debt.

I know a woman who was about to get married and really wanted to clean up her financial life before dragging her new wife into her mess. Bankruptcy was her answer. She didn’t owe much, relatively speaking, but she wanted out from under the stress and went ahead with the lawyer’s recommendation to file. Of course, the lawyer got his money up front as any prudent professional in a bankruptcy would.

Though, in casual conversation as she is a close friend, I strongly recommended that she work out her financial problems instead of filing bankruptcy and walking away, she insisted she understood the risks and went her way. The one risk she could not calculate, and the one that came back to haunt her soon thereafter was that she had not resolved the spending problem. Within a year of their marriage, the lovely new couple was drowning in financial despair, and staggering debt.

It has been statistically demonstrated that the vast majority of those who consolidate debt, whether by combining all the debt and taking a second mortgage or a personal loan, recreate the debt problem quickly. Then they have the consolidated debt, and a new mountain of debt.

When you take a second mortgage to consolidate debt, you put your home at risk for the dubious comfort of being ‘out of debt.’ All you have actually done is put your home at risk. Don’t do it, even when the pundits and marketers insist you will save money with a lower interest rate and those interest payments are tax deductible.

Here is the ludicrous logic of debt consolidation. You bought too many sweaters, because you do look so pretty in pink, a new refrigerator, a new stereo and a computer. The bills are rolling in and you are struggling to make the payments. What is the credit card company going to do, come to your house and take your sweaters? Do you think they might arrive in the night and take your refrigerator? I think not.

When you consolidate all this debt into a second mortgage on your home, or a home equity line, you have secured your unsecured debt with your home. Your home is now at risk if you can’t or don’t pay the mortgage or equity line payment. Exchanging unsecured debt for a lien? You have simply risked your home. Forget about it!

Putting your home at risk, running up new bills after consolidation and incurring the costs of consolidation are a false economy. Instead of consolidating your debt, pay it off. Such a novel concept; pay off your debt while at the same time not creating it anew.

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