Help With Debt: Credit Counseling

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Got a debt dilemma? Get a pro on your side.

For the next several months, I’m doing TV news stories and writing blog entries that are designed to help you find extra money in your budget to help you pay off debt. But this story is specifically addressed to people who aren’t ready to embark on a debt-destroying mission because their debt is currently destroying them. It’s an excerpt regarding credit counseling from my latest book, Life or Debt 2010. In subsequent entries, I’ll be talking about two other methods of dealing with debt: debt settlement and bankruptcy.

Credit Counseling

If you’ve got creditors hounding you and you’re hopelessly behind on your payments, get your debts under control by enlisting professional help. One way to do it to go to a credit counseling agency, either in person, on the phone or online. There’s no shortage of them out there, and many will help you for free.

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 debt destruction. They’re all over the TV and radio these days. Many wave the nonprofit banner like a flag and promise to reduce your interest rates, or even get the amount you owe cut in half. Some claim their services are free, or nearly free. How do these things 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. It’s not a quick fix: a typical DMP lasts three to five years.

Most counseling agencies give free advice, but if you end up in a DMP, you’ll typically pay a small monthly fee to get it set up (0-$50) and monthly fees (5-10% of your debt payment, but normally capped at $25-$50.)

But here’s something important to know: the monthly fees these agencies collect aren’t what keeps them alive. They’re also getting paid by the banks whose accounts they’re collecting. In years past the percentage they got was 10 to 12 percent of the debt. In recent years, that percentage has declined considerably, and some major banks have started handing out grants instead. But nonetheless, the banking industry is really the primary support for the credit counseling industry, and a primary way many credit counselors tap that cash is to put you on a DMP.

Since credit counselors make a large part of their income from putting you on a debt management program, they obviously might have a powerful incentive to do so. Sometimes bankruptcy may be a better option than a DMP, but credit counselors don’t do bankruptcies and don’t get paid for steering you in that direction. What if could manage to pay your debts without a DMP? Again, the agency doesn’t get paid.

Does that mean you should shun credit counselors? Not at all: there are plenty of agencies that will dispense honest, objective advice, including advice that ultimately doesn’t pay them. But what you want to avoid is getting hooked up with a so-called DMP mill. These are companies who 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 tenuous that bankruptcy should be a consideration? You’ll never hear that suggestion from them, since again, they won’t make money if you do that.

For the DMP mill, it only takes 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 before you do anything that you can’t undo. In other words, they should counsel you, not slam you into the only fix that makes money for them. If you can pay your debts without going on a DMP, they should tell you. If you need to think about bankruptcy, they should tell you that.

And by the way, a quality credit counseling organization will also help with other non-debt, credit-related issues. Here’s a story I did on that: How To Find Financial Help.

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 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 offices 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 their Find a Counselor Now page. You can find AICCCA members near you by using their state by state lists.

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.

But 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, buddy! Sign here!”). Check the BBB or other online sources for complaints. And talk to more than one agency. When you talk to several, it’s easy 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.

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  • jjobe

    Hello Mr. Johnson,
    I am wondering about the best possible option(s) for consolidating my current debt without touching my mortgage. I dont know the difference between personal loans, personal lines of credit, home equity loans, etc… it's all so overwhelming and confusing. I just want to consolidate my current debt into one low monthly payment. If I were to accomplish that, then I could of course have the option of paying more per month above and beyond the minimum payment.
    Currently, I have about $50k in student loans, and $8k with one credit card at 0% until 11/2010. My total monthly debt bills are about $550/month. My income is $41k/yr & my credit score is 745. I dont think I need to see a credit counselor as i am not in jeopardy of filing for bankruptcy, and my household bills as well as the aforementioned bills are paid timely every month. I would like to simply consolidate my debt so that i have a little more per month to either invest in a laddering CD, or make an extra payment or two to decrease my debt faster. Any thoughts?