Dr. Don,

I thought Consumer Credit Counseling was for the purpose of helping people get out of credit card debt by making one payment to you and then you disperse the money to the credit card companies. Is this not true? If it is true, sign me up!

--Beth Smith

 

Dear Beth,

It's not true. A Consumer Credit Counseling service will help you get out from under credit card debt, but it's your money, not their money, that gets the job done. A credit counseling service will negotiate with your creditors to arrange a repayment schedule and may be able to lower the interest rate on your credit cards. Using a credit counseling service can affect your credit rating because your creditors will note that your bills are not being paid according to the original credit terms.

That said, there is less stigma attached to credit counseling than there would be to a bankruptcy showing up on your credit report. Consider credit counseling if you can't figure a way out from under your current debt load.

Remember that even though most credit counseling services are nonprofit organizations, that doesn't mean that they won't charge a fee for their services. Most agencies get at least part of their compensation in payments from your creditors.

If you're considering using a credit-counseling firm, you should interview at least two different firms, and review their written contracts before signing any agreements to enroll with a service. This FTC site gives advice on the questions to ask in the interview.

The National Foundation for Credit Counseling can help you find agencies in your area, or even counsel you online. There is also a professional certification process that turns out Certified Consumer Credit Counselors. Ask the firms that you interview about whether their counselors have this certification, and if you can be assigned to a certified counselor.

 

-- Posted: Oct. 11, 2001

 

The Consequences of Credit Counseling

Dear Dr. Don,

I have about $6,000 in credit card debt. I'm considering using Debt Management Credit Counseling Corp. to negotiate my debt. Will this affect my ability to get other loans? Will I be able to use my other credit card for emergencies? Should I get a home equity loan instead?

Thanks,

Troubled Thomas

 

Dear Thomas,

When you use a consumer credit counseling service to help you negotiate a repayment plan with your creditors, your credit report will reflect that you are not paying your bills according to the original credit terms. This will impact your ability to get other loans.

A credit counseling service will typically require that you not apply for any new credit while in a repayment plan on your existing debt and will ask you to not use your credit cards. They're working with you and your creditors to repay your existing debt, and it's a tough sell to ask for concessions on your existing debt when you're out there accumulating more debt.

It's always a good idea to check out the Better Business Bureau's Web site to see if there is a company report on the firm. I did that for DMCC and a new report was in process. You should check back with the bureau.

Credit counseling services generally receive payment from your creditors but many agencies also charge the consumer a monthly fee for this service. Just because a firm is a not-for-profit agency doesn't mean that the service is free to the consumer.

Talk to more than one counseling firm before signing with an agency. The Federal Trade Commission has a list of questions to ask when meeting with a credit counselor. Get everything in writing including the fee schedule and look for any consumer complaints filed against the firm with your local Better Business Bureau or Chamber of Commerce. Look for a Certified Consumer Credit Counselor or comparable professional designation.

If you have the equity in your home to repay your debts, then you should consider that as an alternative to credit counseling. The interest expense on home equity loans can be tax-deductible, potentially lowering the interest rate on your outstanding debt. You're also spreading out the payments over a 10- to 15-year loan.

But when you take on the home equity debt, you're putting your home at risk if you can't keep up with the payments. Too often, people use home equity debt to dig themselves out from under a mountain of credit card debt, only to build up another mountain of credit card debt. The home equity loan hasn't saved the day, just postponed the day of reckoning.

If you go this route, make a commitment to stay current on any new credit card debt, meaning paying it off in full each month.

 

-- Posted: Sept. 7, 2001