Credit Counseling -- What to expect and what to avoid

Credit Counseling or Debt Reduction typically refers to an agency working with creditors to get you a lower interest rate so that you can get out of debt quicker. How this works is, when you sign up with a credit counseling or debt reduction agency, creditors will grant a lower interest rate in a last attempt to collect their money owed—they would rather collect most of their money than none at all. Most times, this is an alternative to people for filing bankruptcy.
When you join up with an agency, there is typically a startup fee, or program deposit required. Be careful if the agency wants to charge you a deposit equal to the first month’s payment. Typically, they’ll tell you that you’ll get this deposit back after completing the program. However, they also know that 75% of the people that join DO NOT finish! Also, many will only give you this deposit back if you follow the agreed to terms. That means if you are late on one payment, don’t pay the full amount of your monthly dues, or even pay MORE than your monthly dues, they count as not sticking to the agreed upon terms and you lose your deposit. Be careful of agencies charging excessive startup fees, too. More than $200 is too much.

After you sign the debt reduction agencies contract and join their program, they will get you lower interest rates and lower payments for the majority of your creditors, however, there may be some that will refuse to participate in the program and will insist that your payment and terms remain the same. The agency will then collect from you the total owed to the creditors every month, plus a monthly fee that they charge. Again, be wary of agencies that charge more than $30 for this fee. In fact, for most states you are not required to pay this fee at all. The agencies will never tell you this fee is optional, though, you have to ask.

After you make your monthly payment the agency will then disburse this money to the creditors. Be sure that, if you send extra money along with your payment that the agency disburses this money to the creditor with the highest interest rate. This will ensure that you save the most money and end the program faster.
After you pay off one creditor the agency should keep your monthly payment the same and apply this now freed money to the creditor with the next highest interest rate. One by one your creditors will be paid off and you will eventually become debt free.

The credit and debt management agencies not only make money from your startup and monthly program fees but they also receive a kickback from the creditors. This is called Fair Share. Creditors will typically allow the agency to keep between 3-15% of your payment as a collection fee! As you can imagine, this can add up very quickly for the credit counselor! This however, is standard industry practice and is perfectly legal.

Another thing that you may want to look for when signing up with an agency; in addition to getting you lower interest rates, they should also provide budget and debt counseling to you as part of their service. Not only should they be collecting your money to GET you out of debt, they should committed to KEEPING you out of debt. An agency that has repeat customers is not a good agency!

Most importantly, be careful of telemarketers that try to get you to sign up on their program. These especially are the agencies that are out to get your money. A good rule of thumb is, if they can’t see you in person, they aren’t worth talking to.

There are many good agencies out their for those people that truly need their services, just be careful and be sure to read the fine print of their contracts!

 
Be sure to read our related articles on Bankruptcy, Debt Consolidation, and Debt Settlement!