Credit Counseling: A Consumer Guide to Debt Management

You may feel like giving up. Suffocating under a mountain of debt can make you feel helpless. Perhaps you’ve even been considering bankruptcy.  The jury is out on whether bankruptcy should be an absolute last resort, or one that should be considered seriously in order to deal with exorbitant, unpayable debt. Still, most people do want to avoid bankruptcy at all costs, and one possible way out is through credit counseling. A Georgetown University study notes nearly 2 million people seek help from credit counseling agencies each year, and most do so to avoid bankruptcy. This might be the solution you’re looking for.

What is Credit Counseling?

A credit counseling agency can help you sort through and simplify your debt issues. Many universities, credit unions, military bases, and housing authorities offer these services. You’ll also find local offices listed online. The most reputable agencies are not-for-profit, but that doesn’t mean all of their services are free. Here are some of the typical services provided by a credit counseling firm:

  • Budget assistance – Most people can’t stand to abide by a budget, but when you’re faced with overwhelming debt, it is a much needed first step. You’ll want to find an agency that will help you through this process face-to-face.
  • Educational workshops – Sometimes a refresher course in personal finance can give you a new perspective and motivate you to conquer money matters. Look for free saving and budget workshops as well as complimentary educational materials.
  • Debt management plans – Avoid any organization that offers to set up a debt management plan for you before a certified credit counselor has reviewed your situation in detail. These plans require you to deposit money with the organization, which will then negotiate a payment schedule with your creditors and pay your debts from your monthly deposits. The Federal Trade Commission has investigated numerous organizations offering fraudulent debt management plans, so be careful before pursuing this option.

Who Needs Credit Counseling?

If you haven’t fallen behind on your bills yet but feel there is a looming financial issue on the horizon, you can qualify to see a credit counseling agency. It’s always best to be proactive and prevent a minor issue from growing into a major one. If you feel you are unable to make a mortgage payment soon, or are just beginning to miss your payment due dates on credit cards, it may be time to get some help. Here are some other warning signs:  

  • You don’t open bills immediately – Stacking unopened statements in a pile means you may be avoiding a debt issue.
  • Living paycheck-to-paycheck – A lifestyle like this will wear you down. If you find you’re “running a bit short” each month or neglecting to contribute to your emergency or retirement savings, you need to quickly shift gears.
  • You keep maxing out credit cards – Habitual spending at, or over, your credit limit is another warning sign — and it’s eating away at your credit score, as well.
  • Hiding bills or purchases from your spouse – Debt cannot be kept a secret forever. It’s best to come clean with your concerns.
  • You’re tapping alternative cash sources – Have you made an early withdrawal from a retirement account, tapped your credit card for a cash advance, or taken out a payday loan? It’s time to reverse your course.
  • The calls have started – The most obvious sign of creeping debt issues is that first call from a collection agent. Mounting money issues will follow if you don’t take action.

Avoid Credit Counseling Scams

Reducing debt is a lot like losing weight. There are no magic pills. Eat less, exercise more. Spend less, budget more. It’s all the same. You won’t be able to walk into a credit counseling agency and emerge debt-free in under an hour. Anyone who makes a promise even close to that shouldn’t be trusted. Forget the commercials. The “credit repair” industry is littered with fraud and scams. To find legitimate help, use these tips as a guide:

  • Know the difference between credit counseling and debt settlement firms – Legitimate credit counselors may make arrangements with your creditors to end collection efforts and late fees while you are in a debt management program. A debt settlement company will likely charge you stiff up-front fees to arrange a lump sum payoff of any debts considered past due. Many will claim that a “new government program” has been launched to assist you. Then they instruct you to stop making all payments on the debts you owe. Many times that will incite the creditor to intensify their collection efforts and perhaps file a lawsuit against you. In fact, some creditors even refuse to negotiate with debt settlement companies. And if a deal is offered, often it is on no better terms than you could have negotiated on your own — but with the exorbitant fees.
  • Beware of debt consolidation plans – Taking a loan out to pay off your debts can be a workable solution if the loan’s interest rate is favorable when compared to the interest and fees you are paying on your past-due debt. But you don’t want to needlessly pile on debt upon debt without examining all of your options. Be especially wary of taking out a home-equity loan to pay off credit card debt. Your home serves as collateral for the second mortgage, and you may lose it if you can’t make the payments.
  • Lean to a non-profit – Unfortunately, not all non-profit credit counseling agencies are legitimate, but it’s a good place to start. Ask the firm you are considering whether they are for- or not-for-profit.
  • See if it’s on the list – The U.S. Department of Justice offers a list of approved credit counseling agencies by state. Make sure the organization you are talking to is on this list. You can also check them out with your state’s attorney general and local consumer protection agency.
  • Make an appointment – You can “test drive” a credit counseling agency by scheduling an initial consultation, which should be free. These meetings will last about an hour and can give you a sense of the thoroughness of the adviser you speak to. Though you can schedule a telephone conference, it’s best to meet face-to-face. Be sure to ask if the counselor is certified.
  • Ask about services and fees – Ask what services are offered and what fees will be charged. There may be an initial charge, as well as a recurring monthly fee. Some agencies will even ask for a “voluntary donation.” Just be sure you understand the costs, because the last you thing you need is another monthly bill. If you can’t afford the fees, legitimate providers will offer to reduce or eliminate fees.
  • Get everything in writing – Every promise, service offer, and fee should be included in a formal written agreement. This particularly applies if a firm offers to implement a debt management plan for you. And of course, carefully read all agreements before signing.
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Put All of Your Cards on the Table

Seeking assistance from a reputable credit counseling agency can signal a fresh start for your financial well-being. Many people facing a debt crisis feel embarrassed, and are unwilling to make a “true confession.” But for your turnaround to begin, you must put all of your (credit) cards on the table and reveal every debt blemish. It can be a humbling experience. Just know that the credit counselor has probably seen worse. The most important thing is to get your money worries out of the way and reduce the debt stress in your life.

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