Is credit counseling right for you

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Debt levels are at its highest and credit counseling agencies have proliferated. People have started to owe too much credit card debt. Most of the individuals or families get stretched over debt payments and simply reach a point where one major emergency or expense can leave their financial life in a turmoil. In general, you can open your yellow pages or surf the web to find some good credit counseling organizations in your neighborhood. Another advantage of selecting credit counseling over the internet lies in the fact that you can post your questions in the forums and people can help you with honest answers.



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Is credit counseling right for you
Sometimes people just owe too much. Charge this, pay for that later.

There's not a lot necessarily wrong with that, but anyone will tell you that if your debt payments begin to get out of hand -- or that paying the minimum each month on all of your credit accounts is all you can afford -- then usually it takes just one out-of-your-control event to keep you from paying your bills on time.

Usually such events include an extended illness, the loss of job or a personal emergency. In such circumstances, what about those companies that advertise to help you with your credit balances, organizations generically called Consumer Credit Counseling Services (CCCS)?

Go ahead, look in the phone book or surf the Internet. You'll be surprised at just how many counseling services there are, many willing to reduce all your payments to one low monthly amount. Sounds good, doesn't it? But you need to know the details and the impact such services can have on your credit -- and your wallet.

First, note that some of these companies may be legal firms soliciting borrowers in trouble for a Chapter 13 bankruptcy. Unlike a Chapter 7 personal bankruptcy which absolves you of your debt, a Chapter 13 keeps your debt intact but makes monthly payments to a third party, or trustee, who will disburse your funds to the various creditors every month until your debt balances are paid.

A consumer credit counseling service does not typically help you file for bankruptcy. Instead, these companies contact your current creditors and renegotiate either the remaining balance, interest rate or both on your behalf.

Why would creditors do that? When a CCCS contacts a creditor, many times it's the last resort before a consumer files for bankruptcy, wiping the debt out entirely. Creditors know this, and may in fact renegotiate to actually get something from the consumer instead of nothing.

Let's say you have ten credit accounts totaling $50,000 and your interest rates for all are over 20 percent. A CCCS will review your situation and work out a budget for you. Monthly payments for food, shelter, clothing, transportation, daycare, insurance...everything is analyzed. Then, a monthly budget is set for you to follow which includes one lower payment, made out to the CCCS each month to gradually pay off your outstanding balances.

So who pays for these services? The consumer can pay a small amount each month directly to the CCCS for some of the income, but the bulk of their income comes from the creditors themselves. The CCCS may also negotiate with the creditors themselves for fee income.

In some cases, the CCCS will collect the entire first payment made to them as a fee for their services. The problem here is that the consumer may not understand that a fee is being paid and, also, the CCCS fee is not reducing the consumer's debt.

The bottom line: Be an informed consumer, ask about fees, and ask especially about how each and every payment you make will be applied to your debt. Ask for references, and check with the Better Business Bureau and Chamber of Commerce before signing up.

Also, it's important to mention that when applying for a mortgage some lenders will view a consumer in credit counseling negatively, and the credit report may in fact reflect that information. Further, creditors themselves may report that the original balance was renegotiated, leaving an ugly mark on a credit report. If you feel you've gotten over your head in bills, by all means, take advantage of all the help that's available. Just be sure to understand the impact a CCCS may have on your future credit report.

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Credit counseling - Proceed with caution

Part of my role in the Queen Creek Chamber of Commerce is to help entrepreneurs start a business. Invariably, once they begin polishing the business plan, the issues of funding and credit come up. Imperfect credit is not uncommon, and the question of what to do about it is.

"Overwhelmed with Debt? We Can Help!" This familiar advertising cry can be tempting to people who feel like they are in a spot. It typically comes from a credit counseling service offering help from creditors and a plan to become debt free. True, such services typically help people work within their income to repay some debt but they often actually hurt your credit standing. In fact, they generally aren't concerned in the least about your credit report or even all of your debt.

Due to the name, many clients automatically think their credit is being cleared. While it's true that paying bills in a timely fashion will improve your credit, there is a lot more to this process. Credit Counseling Services works primarily to get creditors to lower monthly payments, eliminate interest or sometimes accept lump sum payoffs for less than the amount owed. Credit reports for the most part are never even ordered, much less worked on.

A prospect fills out forms that state debt and income. Company staff reviews them and sets an appointment. At this meeting the client brings in bills, and creates a monthly budget. Meanwhile, the counselor will draw up a plan to negotiate with creditors a payment that fits this budget. Once all the monthly payments are compiled into one amount, the client pays the set monthly amount to the company, who distributes it accordingly to each debtor. On top of this monthly payment, there is a nominal fee.

Unfortunately, the majority of the time this type of settlement will appear on your credit report as "settled for less than agreed," or "account settled with CCS." These can appear on your credit report up to seven years after your last payment on the plan. This is negative, damaging information, even though you went on your own accord to seek counseling. Remember, just because a debt is paid, it does not disappear from a credit report.

CCS usually will not handle any secured debt, rent, insurance, utilities, student loans, or a government debt, such as taxes. The majority of the debt it handles is credit-card debt and collection agency accounts. For any other debt, it will advise that you are on your own and to work it out with the creditor directly, although debt-counseling services offer some direction.

There is good in what they do, namely dealing with creditors to get rid of phone calls, at least unsecured creditors. Also, they can encourage you and coach you if you need motivation. Often they provide an alternative to bankruptcy.

But be mindful, well-intentioned credit-counseling services can actually harm your credit. So be careful when looking at this option.




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