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How to select the best credit counseling company?
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How to select the best credit counseling company?
Selecting the best credit counseling service
Credit counseling or debt management agencies are "non-profit" companies that provide several different types of services:
Debt consolidation plans (also called "debt management plans") - in most cases, the credit counseling agency provides a plan that consolidates your payments to unsecured creditors into one lump sum payment. You make a single monthly payment to the agency, and they distribute the money to your creditors. Credit counseling agencies won't help you with your secured debts (such as home or car loans). However, they will work with the unsecured creditors to get you discounts on fees and interest rates.
Budget counseling - the better credit counseling agencies offer classes and counseling sessions to help you improve your money management skills.
Credit counseling works best for people with a steady income and unsecured debt. But remember, a counseling agency can't really do anything to manage your debt that you can't do for yourself if you take the initiative.
Pros The convenience of one payment for all unsecured debt
Possible discounts on interest rates and late fees
Structured payment plan forces you to make regular payments
Helps you negotiate with creditors
Stops calls and harassment from creditors
Cons Doesn't cover secured debts like home loans, auto loans
Agency fees add up to $250 to $5,000
Solutions may not be customized
Agency scams and improprieties
You will have to cancel all of your credit cards and not apply for any new ones during your plan
Did you know? More than 50% of those people who sign up for a debt management plan drop out within three months of signing up. At that point, they're left to manage the credit on their own again, but the relationship with the counseling agency will remain on their credit report and affect their credit.
Learn more about the differences between credit counseling and debt repayment.
What should you consider when deciding whether or not to work with a credit counseling agency?
Before engaging with an agency to solve your credit problems, consider:
Many counseling agencies charge setup and monthly fees that can add up to between $250 and $5,000. If you repair your own credit, you can apply that money to your debts. Avoid any agency that charges a setup fee in excess of $50 or charges monthly program fees greater than $25.
If you handle the payments yourself, you'll be able to monitor them and ensure that all transactions are actually made to the creditors.
When you work with a counseling agency, you will be required to cancel all of your credit cards, and you won't be able to apply for any new credit until your debt is significantly reduced.
Working with an agency shows up on your credit report and creditors may consider it when you apply for credit in the future.
Will the agency manage ALL of your unsecured debts, even those for which the agency receives no compensation? Many agencies will only handle debts for creditors with whom they have a "fair share" compensation arrangement, leaving consumers to manage their other debts. Avoid agencies that will only handle a portion of your unsecured debts.
Are credit counseling agencies truly non-profit?
Despite their "non-profit" classification and their tendency to use the classification as a marketing tool, most credit counseling agencies do make a profit by:
Receiving from creditors a percentage of the amount of debt you repay.
Charging consumers a lump-sum or monthly fee.
Selling services and budget plans to consumers.
How do you find the right credit counseling agency?
Before signing an agreement with a credit counseling agency:
Contact more than one agency to compare what they offer, and consider meeting them in person instead of conducting all communication on the phone or online.
Check out the agency's reputation with the Better Business Bureau and your local consumer protection office.
Evaluate their services - look for an agency that offers some counseling options beyond the standard debt management plan. Do they offer classes?
Add up the costs - figure out what the fees are and how they add up throughout the payment plan. Ask them if the fees are voluntary and only pay what you can afford.
Ask whether the person you're talking to gets more money if you sign up for a debt management plan. You should avoid agencies where the agents are paid commissions to sell you services.
Be aware that major credit card companies have reduced the discounts (also called "benefits") that they're willing to offer consumers in exchange for participating in a debt management program (DMP). Actual benefits you receive will definitely vary by creditor, and may vary by credit counseling agency. It's important that you shop around and get your particular benefits in writing before signing up with a counseling agency.
Ask the company if they're bonded.
Make sure to get all promises in writing, and carefully evaluate any written agreements.
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