WARNING: Avoid debt counselors like the flu

We haven’t spoken much about debt counseling and a few Big Banks out there who try to suck you into debt consolidation by either one unsecured loan or using your home through a refinance or second mortgage.

My advice is to start running (AWAY) from these guys.

I know what you’re thinking. These guys are offering you an easy solution to the problem of to much debt. They say that all your problems will be wiped away in one shot! Many times they’ll offer to lower your overall interest rate and sometimes be able to deduct your interest from federal taxes.

Here’s why they are full of it and you could go bankrupt listening to their advice.

I’ll address the idea of borrowing more first. In my kit, From Debt to Cash, I talk about how you cannot borrow your way out of debt. It may sound like common sense, but it’s true. How can you borrow your way out of debt?

You can’t! You cannot borrow more money and get out of debt. The only way to get out of debt is to pay off your debt.

Here’s one problem with loan consolidations (and by the way there are a myriad of problems with this) you’ll end up with one payment. Well, one big payment is not necessarily the best way to go.

Let’s say you have 10 credit cards you’re trying to pay off. If you consolidate into one payment and have an emergency come up you may not be able to make your consolidate one payment because it’ll be pretty high.

If, however, you stick with multiple bills they are likely to be smaller. If you use my $15 dollar a day strategy you’ll be able to pay more toward one of the 10 bills until you pay off one bill at a time. In other words, there’s room for staggering bills if you need to.

Also, with the reserve fund you’ll have under my plan you’ll be able to use it (ONLY IF IT’S A LEGITIMATE EMERGENCY). If you consolidate all your bills and have an emergency what do you do?

I’ll concede the point that if you can write off your interest payments on your taxes that isn’t a bad thing. But, you’re taking short term debt that you can pay off in a year, 2 years, or under 5 years and turn it into 30 YEARS of payments that will cost you more in the long-run.

Finally, debt counseling usually involves these folks negotiating some of your debt down so they can get paid (yes they are working and will get paid for the work). The problem with debt counseling is it will be noted on your credit report. This isn’t good for several reasons.

First Lenders and the Big Banks look at your credit report and they’re not dummies. They can tell that the creditors on your credit report didn’t get all of their money. Believe it or not they view bankruptcy better then credit counseling because with bankruptcy the problem’s been solved.

Credit counseling prolongs the problem.

Also credit counseling hurts your credit score. You’re better off having 10 accounts than one account showing on your credit report. It’s a little complicated to explain why this is the case but it has to do with complex computer credit scoring models.

In fact it’s better to have 10 accounts showing on your credit then one and its better to have room to borrow on all of those accounts than just one account (see my kit, From Debt to Cash to understand why this is).

Ignore the credit counselor like the flu and use my strategies posted on this blog or get my kit, From Debt to Cash.

A toast to debt free living.

David…