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Debt dilemma? Maybe a credit counselor can help

Here's how to find the right one.

By Stacy Johnson Jan 18, 2010 10:29AM

For the next several months, I’m doing TV news stories and writing blog entries that are designed to help you find motivation, methods and extra money to pay off debt.


But this story is for those who can't yet embark on a debt-destroying mission because their debt is currently destroying them. 


Read this excerpt regarding credit counseling from my latest book, "Life or Debt 2010." In subsequent entries, I’ll be talking about two other popular methods of dealing with overwhelming debt: debt settlement and bankruptcy.


Credit counseling

If you’ve got creditors hounding you and you’re hopelessly behind on your payments, one way to get your debts under control is to enlist the help of a credit counseling agency, either in person, on the phone or online.


Check out this 90-second news story I recently did about this option. Then I'll give you more detail and some specific recommendations.  




Open your yellow pages or look online for “credit and debt counseling” and you’ll see lots of companies that seem to be falling all over themselves to bring you back from the brink of destruction by debt. Many wave the nonprofit banner like a flag and promise to reduce your interest rates, payments or both. 


How they work

Credit counselors typically help by putting you on a debt management program, also known as a DMP.  When you participate in a DMP, the agency is essentially getting between you and the people you owe, most often credit card companies. They contact your creditors and attempt to negotiate lower interest rates, get penalty fees waived and arrive at a monthly payment you can actually afford. Then you send one check to the counseling agency for that amount every month and they divide the money among your creditors.   


How do they get paid?

Most counseling agencies give free advice, but if you end up in a DMP, you’ll typically pay a small fee to set it up (0 to $50) and monthly fees throughout the program, which typically lasts three to five years. Monthly fees are normally 5% to 10% of your debt payment, but capped at $25 to $50.


But here’s something important to know: These small fees aren’t what keep the lights on and the doors open. 


Another source of income for credit counseling agencies is called "fair share": Banks pay them a percentage of the money they collect. In years past that percentage was 10% to as much as 15% of the debt. In recent years, it's declined considerably, but DMPs still represent a major portion of income for credit counseling agencies. 

Since credit counselors make a large part of their income from putting you on a debt management program, they obviously have a powerful incentive to do so.  And some consumer advocates take exception to that, because a DMP might not always be the right answer. Sometimes you might be able to pay off your debts without one, and in others bankrutpcy might be a better option. But credit counselors don't get paid for recommending either. 


Does that mean you should shun credit counselors? Not at all, but because of the potential conflict noted above, approach with caution.


There are plenty of agencies that dispense honest, objective advice, including advice that ultimately doesn’t pay them. But there are also so-called "DMP mills" -- companies that typically do a lot of advertising and put virtually everybody on a debt management program simply because that’s how they make money. 


If your problem includes bills that don’t qualify for a DMP (like a mortgage or car loan, for example) they won’t help you with them. They also won’t offer any type of budget counseling. And if your situation is so bad that bankruptcy should be a consideration? You’ll never hear that suggestion either.  

For the DMP mill, it takes only a few minutes to sign you up for a program, and if you ultimately have to file bankruptcy anyway, who cares? They collected their money for as long as you were able to stick with the program. Making these guys even more insidious is the fact that they can be hidden behind a nonprofit shield.


The way a credit counseling agency should work is that they should counsel you regarding all your debts and present you with all your options. In other words, they should counsel you, not slam you into the only fix that makes money for them.


A quality credit counseling organization will also help with other non-debt, credit-related issues. Here’s a story I did on that.


Specific recommendations

In my experience, Consumer Credit Counseling Service is a good option. They’ve been around for nearly 60 years, have offices in nearly every city, offer independent accreditation and counselor certification, and normally provide an approach as close to holistic and objective as you can find. 


That’s not to say that there aren’t other good agencies, or that all CCCS counselors are perfect. But if I’m going to make a blanket recommendation for a national organization, that’s the one. (Full disclosure: Various Consumer Credit Counseling Service offices sponsor my news reports in some of the cities where I’m on the air. But that’s because I approached them, not the other way around. Long before they began sponsoring me, I referred viewers to them.) 


Consumer Credit Counseling Service agencies, as well as some others, belong to an organization called NFCC, or the National Foundation of Credit Counselors. Another national organization that represents credit counseling agencies is called the Association of Independent Credit Counseling Agencies, or AICCCA. I personally know many members of AICCCA and in my experience, they’re also normally credible and well-intentioned. You can find NFCC members near you with this link. You can find AICCCA members near you by going here.


Are there other quality agencies that don’t belong to either of these organizations? Most definitely. Dues for NFCC and AICCCA aren’t cheap, and I also personally know agencies that don’t feel like paying them, yet still maintain high standards. 


Wherever you go, ask questions before you agree to anything -- for example, the percentage of clients they have on debt management programs. If the answer is nearly all, that’s bad.  If the answer is about half, that’s good, because it shows they’re trying to help their clients with other methods


Ask about fees. Ask about the amount of budget counseling you’re going to get, because if you’re not going to get any tools to help change the way you deal with debt, you could end up in the same place farther down the road. 


Ask if their counselors have any training, and if they do, whether they have any certification. Ask if the agency is accredited by an independent organization. Ask what their help will mean to your credit history. (The correct answer here is, “There’s no way to tell for sure. Could even be negative. But consider the alternative.” The wrong answer is, “No problem, pal! Sign here!”) Check the BBB or other online sources for complaints.


And talk to more than one agency. Only then will you be able to distinguish between the ones that come across like used-car salesmen vs. ones that sound like what you’re really looking for: an objective counselor.  


Bottom line? If you can’t see your way out of a debt disaster, definitely get help. And don’t be ashamed or embarrassed to do so. More than a million people every year file personal bankruptcy. Millions more do nothing to try to help themselves and end up with ruined credit and lots of sleepless nights.  Going to a pro for help may not be your proudest moment, but there are definitely a lot worse things that could happen.


Next time we’ll be covering another heavily advertised debt solution: debt settlement.


Related reading at Money Talks News:

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