Debt management & getting out of debt

Co-author: Olivia Fairhurst 

 The burden of debt overshadows many Kiwi households during tough economic times. Fortunately, there is support available to get out of debt. Canstar takes a look at the options… 

he very words debt management are enough to make hands clammy and hearts race, especially if you are falling behind in multiple repayments on credit cards and personal loans. Biting the bullet and making an action plan to get out of debt is a great place to start. But, avoid jumping from the ashes into the fire by comparing the details of debt management options.

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If you are struggling to get out of debt, you may be keen to seek out the services of a debt settlement company, also known as a debt relief company, debt solution company or a debt consolidation company. In desperate times of overwhelming debt, the advertised promises of these debt management firms to solve all of your finance problems (or something along those lines) can be quite tempting.

But is there a catch with debt solution companies?

Let’s take a look at what debt settlement companies offer to help you get out of debt:

What are debt settlement companies?

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Debt solution companies offer to assist in your debt management through what is known as debt consolidation. Debt consolidation involves repackaging all debts into one loan that may or may not have different fees and interest rates. The Sorted website has some great information on what to think about before you consolidate your debt.

Dangers of using debt solution companies to get out of debt

Because debt solution companies are often run for profit, it’s important to be aware of what they are charging for the debt management service. Their fees can set you back even further and their “solutions” might get you into more debt, rather than help you get out of debt.

For example, the debt management loan they consolidate your debt into might have a higher interest rate, costs or be longer term. When the loan is longer term bear in mind that, although your repayments and interest rate may be lower, you’re paying more in the long run though fees and interest over the years. So, really, you’re putting a band-aid on the problem and digging yourself deeper into debt. Also, if they’re consolidating your unsecured debt (e.g. credit cards) into a secured loan (your mortgage) you could be putting your home on the line. The mortgage might become even harder to pay off and therefore putting your home more at risk.

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Free debt management help through financial counselling

Financial counselling can offer independent and confidential financial advice to improve your financial situation in a variety of ways. This can include helping you make a budget, seeing if you’re eligible for government assistance or referring you to other social help services, if they recognise a wider problem – such as gambling help, drug rehab or mental health counselling.

Financial counsellors can do for free what many debt consolidation companies might charge you for. Instead of directing you towards the most desperate measures, they can help you to consider everything you can do towards debt management in the most efficient way possible, without any hidden agendas.

If you’re drowning in debt or simply seeking financial advice here is a list of free financial help in New Zealand:

Taking charge to get out of debt

Of course, if you want to have the control over the way to get out of debt for yourself, Canstar has a number of articles to help you do this.

First off, you can inspire yourself by reading our ways to save money (if that’s not enough we’ve got more ways to save money).

For potential solutions to your current debt problems, check out ways to make your budget stick and how to spring clean your debt. If you’ve faltered in the past and you’re ready to correct those mistakes, read how to improve your credit rating.

Don’t forget, being aware of the fees attached to bank products, such as credit cards, will help you to select an option which is the best financial fit for your own lifestyle. Every year, Canstar compares credit cards by looking at the fees, interest rates and any rewards available to help you make the right decision. 

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