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Many consumers may have run into significant financial troubles in the last several years, and are now beginning to get their feet back under them. However, much of the damage from overuse of their credit card accounts and stretching their monthly budgets too thin still remains, and now many Americans may be looking for a way back to a comfortable financial lifestyle.

One of the ways many troubled consumers are doing so is by seeking the help of debt management companies. Often, borrowers with a history of credit troubles come to these agencies after conducting a close review of their finances on their own – taking into account all aspects of their fiscal life including all incomes and monthly expenditures that are unavoidable – before determining that their problems are too big for them to fix on their own.

Luckily, debt management companies employ a number of certified, experienced financial professionals whose goal it is to help troubled consumers sort out their debt problems and get their life back on track. Likely, they will start with a more thorough review of their client’s finances in an effort to better understand their full financial situation before proceeding with any more drastic measures. By working with the borrower to figure out what needs to be done to straighten out their finances, and carefully explaining some of the ins and outs of what landed them in their current situation, they might give their new client a better idea of what needs to be done to dig out from under their mountains of debt.

In some cases, the credit counselor may determine that the consumer can’t be helped even by careful budgeting overseen by a professional. As a consequence, they may recommend a program such as debt consolidation. With this debt solution, the counselor will work to find the consumer a lender that will grant them a sizeable loan, typically one big enough to pay off all their outstanding debts at once. The benefit with this method is that the consumer will essentially reduce the number of outstanding debts they have to one, making it easier to keep track of payments and in some cases lowering the interest rate they pay on the balance. However, this method can also do some damage their credit score if they cancel the accounts they paid off, as it may reduce the length of their credit history, their utilization ratio and the number of different account types in their name. In addition, these loans are typically required to be collateralized.

A more drastic method that will help only those consumers in the deepest holes is debt settlement. With this method, the credit counselor will negotiate with their client’s various lenders to get the amount of their outstanding balances reduced by a significant percentage. However, in return for slashing the amount they’re owed, the lender will almost always demand the remaining funds be paid in one lump sum, which for seriously indebted borrowers can still amount to thousands of dollars. As a consequence, it may take at least several months to save up enough money to pay off these balances

it seems to many today that you could be John Dillinger in your lifestyle and get anything you want on credit so long as you have a high enough credit score. How did that come to be?

In previous decades, Creditors had a very sensible lending evaluation approach that employed 4 basic common sense and easy to understand guidelines. These guidelines were administered by actual human beings one application at a time.

Most creditors looked at the following criteria:

1. Paying Habits.

This was simply a look at your credit report, your credit history. The length of time you had been “tracked” in the subject credit reporting agency, the age of your “trade” or credit lines (how were you rated by your creditors over at least one year or more) and the presence of any collections, bankruptcies or tax liens. There were also credit exchanges prior to the “Fair Credit Reporting Act” in the early 70′s that tracked locally pertinent credit activity that wouldn’t necessarily show up on your credit report. As examples, this could be Apartment rental agencies, local jewelry stores and “buy here, pay here” auto sales.

2. Ability to Pay.

By checking your tax returns and pay stubs, a potential lender could determine whether or not you had the income (ability) to meet the payment required on the loan you were seeking. Each lender had their own formula for deciding if a potential borrower was “overextended” in their obligations. A factor was used for basic living expenses that took family size into consideration along with the total of all monthly credit obligations including the loan request currently being reviewed. The remaining income had to meet or exceed that lenders formula for “expendable” or “discretionary” income. A common percentage would have been around 40%. This meant forty cents of every dollar of income was available to spend as you see fit.

3. Stability.

The length of time you had lived at your current residence address and whether you were buying or renting was considered to be two main measurements of stability. The length of time on your current job was also very important to the stability factor. If you moved constantly or changed jobs frequently, you were thought of as a greater risk. Buying was preferable to renting your residence because ownership was seen as making leaving town less likely than if you were renting.

4. Character.

There was a time when your lender was probably someone you knew from the social events in your area. Maybe you attended the same church or your kids went to school together. The laws of the land also allowed greater intrusion into an applicant’s personal life. Lenders could talk directly to employers, landlords and even neighbors. At any rate the world was smaller and knowing the character of borrowers was easier and often a strong factor in approving or denying a loan request. If your credit report showed a history of small collections, tax liens or repossessions, this would also be thought of as a character issue as well.

In the early 70′s there began to be reports of studies made using multiple thousands of loans that had produced proof that a score system would have had equivalent or better results relative to losses. Credit scoring would also limit human judgment errors in the lending process. By the beginning of the 80′s, credit scoring had been or was being implemented at virtually all the biggest lenders. Determining credit worthiness took a giant step forward when statistical models were built that considered numerous variables and combinations of variables.

Today, with the help of computers, millions of loans can be compared within unlimited categories even though the same 4 elements still apply. This really means you and I will be measured against borrowers with similar situations, incomes and credit histories. Borrowers with limited credit histories will be measured against others of similarly limited borrowing histories and not lumped in with all borrowers. This allows lenders to compare true comparables, ensuring that your credit behavior is judged in a context that is relevant and fair.