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In Debt? Know Your Options

Feeling overwhelmed by credit-card debt following the holidays? The most disciplined savers may buckle down and develop a pay-off plan that they stick to month-by-month. Other mere mortals may need a little help.

If you're thinking of turning to financial planners, you should know what you're getting into. Most financial professionals offer strategies that work for some, but it?s not a silver bullet for all. Understand who these strategies help, how they work and whether there are any downsides before you make a move.

Here are three well-known financial strategies. See if they work for you:

1. Debt Counseling

Who it helps: Millions of consumers who find themselves in a bind turn to debt counseling services each year, according to the National Foundation for Credit Counseling (NFCC). These companies assist people who need help developing a personalized plan to solve money problems now and avoid others in the future.

How it works: These organizations help you make sense of your financial situation by discussing your entire financial situation with you in depth. They should design a custom plan to solve your money troubles today and show you ways to avoid others tomorrow. An initial counseling session typically lasts an hour, with an offer of follow-up sessions. Make sure the company you choose offers a range of services, including help with bill payments, budget counseling and savings and debt management classes.

Steer clear of highly hyped get-out-of-debt-quick offers. "Getting out of debt takes time and consistency," warns USAA Certified Financial Planner ? J.J. Montanaro. "There are no magic bullets." Instead, consider seeking free or low-cost help at a legitimate debt counseling organizations, such as the NFCC. The NFCC has branches throughout the country and is a non-profit, community organization that provides free and confidential debt management advice in person or by phone. You can also contact the Association of Independent Consumer Credit Counseling Agencies.

Potential downsides: Do your research. In recent years, the government cracked down on unscrupulous operators who call themselves debt counselors. Check out the agency in advance before signing anything or handing over any account numbers. Many states require that an organization register, or obtain a license before offering credit counseling, debt management plans and similar services.

2. Debt Management Plans (DMP)
Who it helps: People who want help to simplify bill payments and to have the option of arranging lower payments.

How it works: Typically, you make one monthly payment to the credit-counseling agency, and it makes the agreed-upon payments to your creditors. A counselor acts as a go-between with creditors to negotiate for a payment plan that lowers both payments, and, ideally, interest rates and waives certain fees. You'll have to agree to stop using your credit cards and not open any new credit accounts. The agencies are paid in part by the lenders, but generally charge you a fee to set up a plan and bill you a monthly fee. Avoid plans that require more than $50 initially, or monthly fees of more than $25.

Potential downsides: This is definitely not for everyone. This kind of plan could have a negative impact on your creditworthiness because it's an indicator that you've had financial problems. Additionally, creditors may notify credit reporting agencies that you're on a DMP and aren?t making agreed-upon payments, even though they accepted the reduced payment.

3. Debt Consolidation

Who it helps: People who want to have fewer bills each month and save on interest by bundling all your debts into one big loan.

How it works: There are several ways to bundle debt and receive one payment with a lower interest rate:

  • Personal loan. Check with your credit union or bank to see what rate you might qualify f or on a personal loan.
  • Tap home equity. If you're a homeowner, a home equity loan or refinancing might be an option for switching double-digit credit card bills to a lower-rate loan. These options may have some associated costs, including closing costs.
  • Credit card balance transfer. This move allows you to roll other debts onto one low-interest card, although such offers are tougher to come by in today's economy than they once were. If you decide to pay off one card with another, avoid running up new charges on that old card once the balance has been paid in full. It can be tempting. And, it's best to cut up the old card. Read the fine print of the offers so you won't be surprised by transfer fees or other related fees.

To take full advantage of this scenario, says Montanaro, work to pay your loan off ahead of schedule. If it's a five-year loan, for instance, try to up the payments to wipe it out in three years time.

Potential downsides: Some such consolidation moves include additional fees, such as loan application fees or credit card balance transfer fees. And, as always, if the offers sounds too good to be true, ignore them.

For more banking and saving advice, check out Military.com's Finance channel.

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