Debt Management Credit Counseling

What Debt Management Credit Counseling Can Do For You

A debt management credit counselor provides debt advice and helps you set up a financial plan that assists you in getting out of debt. The fact that you're undergoing credit counseling demonstrates to creditors that you are serious about managing your debt and may make them more willing to hold off on hiring collection agencies or reporting your debt problems to credit bureaus. It may also create an opportunity for debt negotiation, which could encourage them to lower your interest rates or waive some penalties.

Most credit counseling agencies provide debt management services that let you consolidate debt in addition to counseling. These services will work with your creditors to set up regular payment plans. The payments go through the agency which means you have only one monthly bill to pay and one organization to work with.

When To Use It

The time to get into debt management credit counseling is when your debt begins to be a problem, not when it's so late that you've lost options. Some questions to consider in deciding whether you need credit counseling include:

Amounts

• Am I starting to lose sleep over my debt? Do I feel helpless about it or as though I'll never be able to get out of debt?
• Am I rotating my debt from one credit card or loan to another instead of actually paying it back?
• Am I paying more on interest than the principal balance?
• Does bankruptcy look like my only option?
• Am I paying interest rates that are higher than the normal market rates?

If you said yes to any of these questions, credit counseling may be able to help you pay off your debt more quickly or reduce the amounts you're paying on interest.

Kind of Debt

• Am I carrying more consumer debt than debt for necessities, such as student loans, medical bills, or mortgage payments?
• Is it my consumer spending that's the problem rather than debt that I couldn't help (alimony, child support, medical costs)?
• Do I have spending habits that I can't break? Do I feel like a shopaholic?
• Do I hide my spending from others?
• Am I unable to make or to stick to a monthly budget?

If it's your spending habits that are the problem, credit counseling can help you understand and manage your personal spending as well as set up plans to help you to get out of debt.

Picking the Right Counselor

The National Foundation for Credit Counseling is the largest national organization of credit counseling firms. Membership in the NFCC is no guarantee of quality or honesty, but accreditation is a requirement for membership and they are required to adhere to certain standards.

Because people in serious debt often feel helpless and don't know where to turn, there are a lot of scams out there. Some unethical agencies promise help but do not deliver on the promise. Many of these agencies are categorized as non-profit but have tricky loopholes that let them funnel huge profits back to a for-profit corporation or give themselves huge salaries and “expense accounts.” Here are some of the warning signs of a scam:

• They promise quick and easy solutions, such as “erasing” your debt, “fixing your credit,” and so on. If it sounds too easy or too good to be true, it probably is.
• They claim to be a nonprofit, but have certain “donations” you have to pay every month or to start off with. An honest organization will make it clear what's a fee and what's a donation, and that donations are voluntary. Look for any fine print that says a portion of your payment goes to the agency each month, as that's a clear sign of something fishy going on.
• They don't or say they can't work with all of your creditors. Reputable agencies either have or are willing to start relationships with virtually every creditor. True, some creditors may not give you special considerations because you are working with a credit counseling organization, but creditors are usually more than willing to accept payment through agencies.
• Ask for proof that your payments through the agency are bonded or insured. This protects the agency and you if somebody is embezzling funds or the agency goes bankrupt itself. If they don't have proof, it should raise a red flag.

What to Expect

When you sign up with a credit counseling agency there are a few things you need to expect:

• This is not a quick fix. Successfully completing a credit counseling program can take years.
• You will probably be asked to sign an agreement that you won’t seek out additional credit while on the program. Even if you decide to deviate from the contract you will quickly realize that most credit counseling agencies report your enrollment on your credit report, so your application will more than likely be automatically rejected.
• Your credit may suffer as a result of enrollment in a credit counseling service, but if the program helps you get back on track you should not concern yourself with the temporary dip in credit score and instead focus on the long-term gain.
• The history of your enrollment into a credit counseling service can remain on your credit report for some time. That means that you may have to explain to potential lenders your previous enrollment into credit counseling years after you complete the program.

A credit counseling program should only be entered into if you genuinely need the assistance to get your finances back on track. Once you enroll in the program you need to be sure to follow the plan precisely if you want to yield maximum results in the shortest amount of time possible.