Finance I: Debt Counseling and Debt Consolidation
Debt is a huge financial issue in the United States. Between credit cards, car loans, mortgages, and other miscellaneous bills, the average American household owes over $45,000 not including a mortgage. According to the latest information from the Federal Reserve, Credit debt has exceeded $3.5 trillion. More and more people are purchasing products and services using credit. There has been a dramatic increase in the number of car and student loans over the last 5 years, and this is nothing compared to the credit card debt in each household which has surpassed an average of $15,000. There’s no doubt as to why they call it “drowning in debt.”
Money problems keep a lot of people awake at night. For some, the stress becomes so bad it causes relationship issues. When people make purchases, they often don’t think about how it all adds up. For example, someone may have a mortgage and two cars that they are making payments on. For most people this is a manageable situation, but add the utilities, cable, cell phones, internet, insurance, etc. and it becomes apparent that bills stack up. Add fast food to the mix and monthly expenses often go beyond a person’s monthly pay. This causes people to turn to credit cards, adding to their debt.
*A special note on debt: finances are a prominent cause of depression throughout the world.
Debt Counseling and Debt Advisors
Many people in dire straits turn to debt counselors or debt advisors to help them prioritize their financial situation and get them out of the red. Debt counseling has become a big industry over the past 30 years. Debt counseling services range from simple budgeting to an overhaul of an entire lifestyle.
The number one goal of a debt counselor is to understand what a person’s financial goals are and examine the specific actions that are causing them to deviate from that goal. Most people have long-term financial goals, but unfortunately, the way they live and spend money is a direct contradiction to their goal. Without good spending habits, people tend to spend money without thinking about their long-term goals.
A good debt counselor will first look at the client’s current debt. Unfortunately, without taking the legal route to bankruptcy, debts must be paid. Some debt counselors and debt advisers will help clients get in contact with debtors to make arrangements to get things paid off. Very often, a business will be glad to work with someone who owes them money, because it means that they will eventually get paid. This can often be accomplished for sums of less than $10,000. Utility companies are always happy to work with customers as long as they are kept in the loop. If someone waits until the power has been turned off to make a arrangements, it is often too late.
Moreover, a debt counselor who really understands finances will understand that there is such a thing as “good” debt. For example, a mortgage is an asset, and as long as it is being paid it is considered good debt and will help and individual’s credit score. Even credit cards with a low interest rate and moderate balance are considered to be examples of good debt, because timely payments make a big impact on a person’s credit report. The key that a debt advisor understands is that 12 credit cards with a moderate balance is not the same as one or two.
The debt counselor will then take a closer look at their client’s spending habits. If a person only makes $1000 per week, yet spends $1500, there’s a problem. Debt counselors will look at everything. They will often ask for a number of different receipts and bills. They will inquire about how often a person or family eats out, how far they drive each day to work, how much they may spend on services such as Uber, how much monthly cellular service costs, etc.
Counselors will tailor a personalized payoff strategy and organize all the client’s debts on a spreadsheet. This information is fully explained to the client who is also taught how to modify their spending habits. They will make recommendations as to which debts should be handled first and which could wait. Usually, the counselor will advise that smaller debts should be taken care of first so that they can be removed from a credit report. For many clients, paying off a bill offers them the psychological momentum to continue with their budgeting.
Success Tip: There are a number of non-profit debt counseling organizations that offer services for free. While they may not go as in-depth as a paid advisor, a client won’t be adding to their debt by using them. As a sales agent, you can expand on the fact that you are trying to help people get the services they need from trustworthy sources, and a good non-profit debt counselor is a great match.
There are no educational requirements to become a debt counselor, though most professional advisors will have a degree in finance or business. Degrees in finance usually involve extensive courses in mathematics, accounting, and financial instruments. Many debt counselors spent years in the investment side of finance. However, to become a member of the National Foundation for Credit Counseling (NFCC) an applicant usually has a degree in finance. Some states require debt counselors to be licensed as financial advisors.
Many larger debt counseling businesses will often have associate counselors, which often do not need to meet the same educational requirements as the primary advisors do. However, many of them are usually in a training program within the company to help them learn the required skills to become a qualified advisor.
Keys to remember about debt counselors:
Debt consolidation is different than debt counseling, though there are many debt advisors and debt counseling companies that will offer debt consolidation as an option. Debt consolidation involves taking a number of small to medium size debts and consolidating them into one larger debt with, hopefully, a lower interest rate. There are a number of ways this is done and for different reasons, but generally, the total debt a consolidator will deal with is less than $50,000.
Ways debt consolidation is accomplished:
Debt consolidation companies often focus on the last method above. Many of these companies act as middlemen and pay off the debts and create a “loan agreement” for the client to pay them back. Of course, most companies that use this method are trying to make money, and they do so by contacting a client’s creditors and making deals with them. For example, a $550 bill that is accruing 10% monthly interest, a consolidator may make a deal to pay the company a $480 lump sum pay off (in truth, they would likely pay less). The consolidator will then add the original $550 to the client’s overall loan amount and charge between 10% and 21% apr on the loan. So the consolidator earned $70 right off the bat and they will continue to earn interest on the loan. Add 12 to 15 debts of this average amount to the full consolidation loan and the company has made between $800 and $1000 just for making the deal, and will earn anywhere from $1200 to $5000 on the loan’s interest.
But not all debt consolidators are out to make a quick buck. There are non-profit agencies that will work with clients and help them make arrangements to transfer balances to a single credit card, or work with a local lender to get a loan to cover the debts. These non-profit agencies will also help consumers make deals with their creditors to lower costs.
Some quick information about American Debt:
Debt is the American way. Our entire credit system is built on the idea of debt. Some debts can make an individual’s credit score stronger, but if payments aren’t made and debts begin to default, it can be a bad thing. Debt counselors work to help clients who have found themselves “under water” and help them find a stronger financial future.
Debt consolidation is a method of debt relief that takes a number of a clients current debts with different companies and places them under one payment. This can happen in a number of ways, but debt consolidation companies generally create a single loan that pays off the debts and requires the client to pay them back for the service.
As a sales agent, it is important to focus on the emotional side of the sale. Debt counselors are often empathetic with the financial problems of their clients, even more so when their client is part of our target demographics. By emphasizing the idea that our aim is to ensure that people in need get the support they need from trustworthy professionals, you will help to create a bond between them and the advisor.
With Geo-Fencing, we can promote a financial advisors services to help those in need and target demographics like homeowners, renters, men and women of certain ages, households with an income over $100,000 and more by using our special targeting groups.