Living paycheck to paycheck? Worried about debt collectors? Can’t seem to develop a workable budget, let alone save money for retirement? If this sounds familiar, you may want to consider the services of a credit counselor. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But beware, just because an organization says it is “nonprofit” does not guarantee that its services are free or affordable, or that its services are legitimate. In fact, some credit counseling organizations charge high fees, some of which may be hidden, or urge consumers to make “voluntary” contributions that cause them to fall deeper into debt.
Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.
Reputable credit counseling organizations advise you on managing your money and debts, help you develop a budget, and usually offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.
A reputable credit counseling agency should send you free information about itself and the services it provides without requiring you to provide any details about your situation. If a firm doesn’t do that, consider it a red flag and go elsewhere for help.
Once you have developed a list of potential counseling agencies, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau. They can tell you if consumers have filed complaints about them. But even if there are no complaints about them, it is not a guarantee that they are legitimate. The United States Trustee Program also keeps a list of credit counseling agencies that have been approved to provide pre-bankruptcy counseling. You can find a state-by-state list of government-approved organizations at www.usdoj.gov/ust. After you have done your background investigation, it is time for the most important research — you should interview the final “candidates.”
If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. Consider signing on for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still will help you create a budget and teach you money management skills.
How does a DMP work? You deposit money each month with the credit counseling organization. The organization uses your deposits to pay your unsecured debts, like credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates and waive certain fees, but check with all your creditors to be sure that they offer the concessions that a credit counseling organization describes to you. A successful DMP requires you to make regular, timely payments, and could take 48 months or longer to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan. You also may have to agree not to apply for or use any additional credit while you are participating in the plan.
The following steps will help you benefit from a DMP, and avoid falling further into debt.
- Continue to pay your bills until the plan has been approved by your creditors. If you stop making payments before your creditors have accepted you into a plan, you will face late fees, penalties, and negative entries on your credit report.
- Contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the credit counseling organization for your DMP.
- Make sure the organization’s payment schedule allows your debts to be paid before they are due each month. Paying on time will help you avoid late fees and penalties. Call each of your creditors on the first of every month to make sure the agency has paid them on time.
- Review monthly statements from your creditors to make sure they have received your payments.
- If your debt management plan depends on your creditors agreeing to lower or eliminate interest and finance charges, or waive late fees, make sure these concessions are reflected on your statements.
If you decide to work with a credit counseling agency, spend some time researching your options and take care to select a reputable agency. Your goal should be to find a credit counseling agency that has satisfied clients, offers personalized service from trained counselors, can educate you how to make appropriate financial choices and will provide you with the tools you need to achieve financial security.