This month we’ve been running a series on New Year’s resolutions to get in better financial shape. We’ve offered 5 Steps To Building a Budget That Works, 5 Steps to Saving More This Year, and 5 Steps to a Debt Free Life.
These are all laudable goals that everyone should work toward, but some people are truly overwhelmed by their financial burdens and instead resolve to find outside help — in the form of credit counseling.
The way credit counseling works is to essentially get in between you and your creditors. You send one check to them monthly, they divide it up and pass the payments along to your credit card company or other creditors. They also notify your lenders that you’re in their program, and they try to negotiate lower fees and rates on your behalf. A debt management program, known as a DMP, typically lasts for 3 – 5 years, during which time you’ll pay the entire debt.
While you’re in a debt management program, you’ll have no access to credit cards.
There are a lot of credit counseling organizations out there offering to help, and many make big promises, like cutting your interest rates in half. Some tout their non-profit status, as if that in itself makes them trustworthy. Unfortunately, however, not all of these organizations are reputable. Here’s a story Stacy recently did that raises some good questions – check it out and read more on the other side.
How else can we separate good and bad credit counseling practices? Here’s what bad ones do:
- Charge big up-front fees. We’re talking in the hundreds or thousands. Realistic fees to get started should be under $100 — some groups will help for free — and if you do end up in a debt management program, the monthly fees should be minimal: generally less than $50.
- Tout made-up credentials or non-profit status. Qualifying as a 501(c)(3) nonprofit is often a sign of a reputable agency, but if the company makes much of their status, be skeptical. They should have other credentials in the field itself, and not ones they made up or awarded to themselves. Some companies claim to be nonprofit when they aren’t, as well: look up the nonprofit status of any group at the IRS.
- Promise it will only take a few minutes. Nobody can miraculously or instantly solve your problems, but some agencies will try to lure you in by telling you how simple and quick it is. Talking through your financial situation — including your income sources, debts, and budgeting practices — will probably take up an hour or more, and that’s only the first step. There’s a reason this is called “counseling”. The people you deal with should be working with you, not popping you into a once-size-fits-all program.
- Rely heavily on TV or Web advertising. The first people you call shouldn’t be the people calling you, or the people running TV and radio jingles, or the people sending you junk mail. The highest-quality non-profit groups often don’t have the money to do a lot of advertising: they put their money into services instead.
- Mislead you about credit risks. Anyone who promises debt relief services “can only help, never harm” is lying. Signing up with one won’t hurt your credit score, but a debt management plan will show up on your credit history. Lenders will see it, and it could make some hesitant to lend to you in the future.
- Offer a one-size-fits-all solution. Yes, there are certain things most people in serious debt will need, like a debt management plan. But there are people who can fix their problems without one, so if a DMP is all they offer you, be skeptical — the advice and aid should be tailored to your situation.
- Only help people with a minimum amount of debt. Counselors should be willing to work with you regardless of what you owe — a group that only helps big debtors is probably one that is more interested in helping its own bottom line rather than yours. And if you’re having trouble with your mortgage, make sure the agency you contact offers housing counseling.
- Have unresolved or problematic complaints with the BBB. People who feel ripped off may file complaints with the Better Business Bureau, so look up any group you’re considering and see what people have said and how complaints about the company have been dealt with before.
Conversely, good agencies:
- Disclose all fees, and keep them small. While bad orgs charge up-front fees, good orgs are up front about having them. According to the National Foundation for Credit Counseling, “Any set-up fee or monthly fee should be reasonable, usually defined as $50 or less, with monthly fees in the $25 range. The agency should be willing to waive all fees in cases of true hardship.”
- Are accredited by the COA and affiliated with the NFCC. The Council on Accreditation is one place that should vouch for a company’s credentials, and there are others. You can look up COA accreditation online by state. Another way to locate a reputable credit counseling group is to search through the NFCC, which has a 60-year record and only supports legit groups. They also have a lot of advice on what to expect from credit counseling.
- Work with you as long as necessary, by whatever means necessary, with all your creditors. Although there may be a monthly fee, a serious organization will keep working with you until they don’t need them. They should offer service by multiple means, include by phone, online, and in person and take a holistic approach to your credit struggles.
- Spend resources educating people, not on lots of TV advertising. Many good organizations offer free seminars or advice online about avoiding and managing debt. A non-profit’s ultimate goal shouldn’t be fame and fortune, it should be helping people.
- Give honest assessment of your credit and the risks of counseling. A good group will aim to keep you out of bankruptcy, but will tell you if that’s the best option. They’ll also let you know that signing up may look bad to some lenders.
- Tailor the plan to your needs. Some people just need to sacrifice spending in certain areas to repay their debt, while others need a debt management plan and an advocate to negotiate on their behalf with creditors. A good agency will figure out what you need and help you get there, rather than pushing pre-packaged solutions on you.
- Help anyone who asks. This is pretty self-explanatory, but reputable groups don’t place restrictions on who they help, as long as they can bring the necessary paperwork. They’re not judgmental, either.
- Are licensed, insured, and answer to you. While unreliable agencies are often impossible to get satisfaction or even an explanation out of once things go south — resulting in complaints to the BBB — trustworthy groups earn their trust by proving that they have the proper legal backing and by providing you with a statement at least quarterly.
Need more help dealing with debt? Read the inspiring story of Jen, who dug out of almost $10,000 in debt thanks to our advice, in Reader Shrinks Credit Card Debt. You almost might want to check out 5 Tips to Find the Right Debt Relief Agency, Can I Negotiate Debts Myself?, New Debt Settlement Rules, and 3 Steps To Improve Your Credit History.
There is also one type of help with debt that you might want to avoid – debt settlement agencies. These are businesses that promise to radically reduce your debts by negotiating with your creditors to pay, say, 50 cents on the dollar. While the idea may seem tempting, there have been lots of issues with these types of businesses. Check out Should You Try Debt Settlement? and Debt Settlement Industry Defrauds Consumers.
One final idea – check out Stacy’s book, Life or Debt.
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