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Using A Credit Counseling Service
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Understanding credit counseling
Many of us have seen the advertisements on television. "Get out of debt fast!" "We can solve all your credit problems with only one call!" These sound really great but you know that, realistically, one call is not going to solve your credit problems.
If it were so fast and easy to get out of debt the credit card companies and these agencies advertising on television would be out of busi... Read credit counseling article
How to build a good credit score
Building credit is an essential part of any financial portfolio. It allows you the freedom of using other peoples money and getting it at a low rate of return to the lending party or more commonly known as the interest rate.
Your credit scores show your ability to repay your debts and obligations to creditors in a timely fashion. When you have financial difficulties or are just poor at ... Read credit counseling article
Using A Credit Counseling Service
If you are seeking credit counseling services, the odds are that you are already in a financially precarious position - few people seek credit counseling before they are over their heads in debt, perhaps also being hounded by creditors. When a credit counseling service promises an easy resolution to your credit woes, it can be tempting to believe everything they say - and a good credit counselor can provide a great deal of assistance. But you have to exercise care, or you can end up with a credit counseling service that will take advantage of you.
Who Benefits From Credit Counseling
People who will most benefit from the services of a credit counseling firm are typically unable to make minimum payments on their debts and are not able to pay all of their bills in a timely manner. Many are already being sent threatening letters from their creditors, or are being targeted by collection agencies.
Credit counselors assist with unsecured debts, such as personal loans and credit card debts, or bills for medical care. They typically do not work with secured loans, such as home mortgages or car loans, or with payments due for utility services or insurance bills. However they will consider your entire debt load when creating a budget and repayment plan. Also, if you are at risk of foreclosure or repossession, they may be able to assist you or advise you as to how to contact your lenders and obtain additional time for you to catch up on your late payments.
If a credit counseling service can negotiate your debts, create a budget to help you keep on top of your obligations, and provide any appropriate debt management services, you will probably benefit from working with an ethical service. But if your financial situation is beyond that type of management, you may need to consider bankruptcy.
What Services Are Provided?
A typical credit counseling service focuses first on assessing your financial situation, and next on negotiating better interest rates with your creditors and helping you establish a budget and payment plan. They then provide debt management services, with the client paying a monthly fee which will is used to pay the client's debts and, assuming the counseling service's fees are not being paid by the client's creditors, the counseling service's fee for managing the debts.
Credit counseling services will typically attempt to renegotiate your debts to try to obtain lower interest rates or even voluntary reductions in the principal owed. If the credit counseling service offers a debt management program, as most do, clients who use those services will pay the counseling service a monthly fee which will be used to pay the client's debts, and the counseling service's fee for managing the debts.
Note that if a creditor is not included in a debt management plan, you will be responsible to continue to make payments to that creditor on your own. You should clarify with your credit counseling service which, if any, of your debts you must continue to pay yourself.
There is a significant difference between a credit counseling service and a lender providing debt consolidation loans, or a service which promises to "repair" or renegotiate your credit without providing any counseling or support. A company which promises to resolve your debts "for pennies on the dollar" is not a "credit counseling service" as that term is generally understood - and no respectable credit counseling service would make such a claim. Many such debt settlement services are fly-by-night operations which charge significant fees, and which may disappear with your money without having actually performed any services on your behalf.
Fees and Commissions
Credit counseling services obtain fees in two manners. First, they may charge the consumer a fee for the counseling service. Second, as they negotiate a payment structure with your creditors, they may receive a fee or rebate from the creditors.
Warning Signs of a Questionable Service
The following signs suggest that you may have contacted a service more interested in profiting from your situation than in helping you resolve your credit problems:
Excessive Fees - Services which charge large up-front fees or high monthly commisions may be more interested in turning a quick profit than in actually helping you with your debt situation.
Extraordinary Promises - Services which promise to settle your debt for pennies on the dollar are unlikely to be ethical or responsible. Similarly, services which promise that negotiations with your creditors will have no effect on your credit rating should be viewed with skepticism.
Missed or Late Payments - If the credit counseling service is providing you with debt management services, it should make all payments to your creditors in a timely manner.
Play it safe by seeking credit counseling and debt management services accredited through the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. It is far less likely that an accredited organization will charge excessive fees or try to take advantage of you, than it is for an organization which is not accredited.
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How to find a good credit counseling service
As you shop around for a credit counseling service, you may wish to consider the following questions.
What Fees Do They Charge?
Before you sign up for credit counseling services, it is important to learn what fees they charge and how those fees are paid. Avoid a service which charges large up-front fees. Don't be put off by a service which collects a commission from your credit card company or other creditors for managing your debt, but be wary of one which will take a big slice of your monthly payment to cover its commissions even before it services your debts.
Some services suggest that it is better to work with a service which charges you a large fee, rather than deriving the bulk of its fee from discounts and rebates from your creditors. Keep in mind that creditors work voluntarily with credit counseling and debt management companies, and are paying any fees or rebates voluntarily. Also, some firms which charge you a great deal of money will still attempt to collect rebates from your creditors to fatten their fees.
You should request that your credit counseling service provide you with monthly statements for their debt management plan, reflecting the amount you paid in, the dates and amounts they paid to each of your creditors, and the amount of their fees.
Where Are Their Offices?
Some credit counseling services operate at a distance, while others make a point of meeting with debtors in a local office. You won't necessarily save money by using a service which doesn't offer a local office, and sometimes it is easier to make and stick to a budget when you are working with somebody face-to-face. Also, local credit counseling agencies sometimes offer educational programs or classes, which may benefit you when you are deciding if you need credit counseling services, and may provide further assistance while you are participating in debt management.
It is okay to work with a credit counseling service over the phone, particularly if you are embarrassed about meeting your credit counselor in person, but you should take care to verify that any service without a local office is in fact legitimate.
Who Is Your Counselor?
With some services, to the extent possible you will receive services through a specific credit counselor assigned to your case. With others, you will get whomever happens to be available at the time of your call or appointment. If you want a more personal relationship with your credit counselor, you may wish to confirm that your service will assign you to a specific counselor, and that you are comfortable with the counselor assigned to your file.
What Services Do They Offer?
While a typical credit counseling service offers budgeting assistance and debt management services, most established services also offer educational programs. These may take the form of classes and seminars, self-study programs, and Internet programs. Try to work with a service which will do more than simply set up a repayment plan, but will help educate, support and guide you through the resolution of your debts. If educational materials or programs are offered, ask if they are included in the fees you are already paying or if there are additional costs or fees.
What Promises Do They Make?
If a service is promising to resolve your debts for pennies on the dollar, suggests that they can "repair" your credit by removing accurate information from your credit report, or promises you that its debt management program will not affect your credit rating, be skeptical of the service. No credible or ethical credit counseling agency will make that type of promise.
What Accreditations Do They Have?
It is wise to seek credit counseling through a service accredited by the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. It is far less likely that an accredited organization will charge excessive fees or try to take advantage of you, than it is for an organization which is not accredited.
Will Your Creditors Cooperate?
In many cases, creditors are happy to work with credit counselors, as they want to help their debtors stay out of bankruptcy. An "unsecured debt" such as a credit card debt is typically discharged through the bankruptcy process, leaving the creditor with nothing. However, if it turns out that few of your creditors are willing to cooperate with your credit counselor, no matter how good the service, you may obtain little or no benefit from utilizing its debt management services.
Thus, when you approach a credit counselor, you should be prepared to ask what its experiences have been with your more significant creditors. You may be able to find a service which has a better track record with your creditors, and is thus more likely to be able to negotiate a repayment plan that is in your financial interest.
If certain creditors are not included in your debt management plan, you should make sure that you have a clear understanding of who those creditors are. You will be responsible to continue to make payments to those creditors on your own.
When Are Creditors Paid?
You should try to work with a service which takes into account both when you are paid, and when your bills are due. Some services try to pay all creditors for all of their clients on a single date each month. This can cause them to pay some bills almost a month early, and in some circumstances to make late payment on other bills they manage.
Can You Make Payments Electronically?
If your debt management payments can be automatically withdrawn from your bank account each month, it is easier to keep on track with your program. While you still have to make sure that your bank balance is sufficient to cover your payment, with electronic transfer you are far less likely to make late payments or miss payments, and are thus more likely to successfully complete the program.
What Happens If You Have Difficulties?
Given that many people have difficulty sticking with a debt management program, or encounter sudden financial emergencies during the course of a debt repayment plan, it makes sense to ask up front what will happen if you miss a payment, are late with a payment, or may not be able to make your full contribution.
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