What You Need to Know About Credit Counselors

Credit counseling organizations are designed for people who are so far in debt that they are facing bankruptcy. This is an important distinction. If you find yourself with poor credit and a poor credit score but are not drowning in debt, what a counselor will suggest is what you already know: be disciplined to create a workable budget and stick to it while you work out repayment plans for any creditor with which you are in arrears. Now if you have tried to do this with little success you may benefit from the service.

We all know how easy it can be to get off track and spend a bit more than we can afford to have a decently comfortable life. There are times when we don’t realize just how much credit card companies charge in interest and late fees. A nonprofit debt consolidation program or credit counseling organization will work with your creditors to reduce or eliminate late payment charges and delinquent fees.

There is another point to consider before you decide to get involved with a credit counseling or repair company. Once you are enrolled and under contract, this may show up on your credit report. With this on your report, you will most likely have trouble working out any financing or loan until you complete the contract. Credit counseling organizations can be a helpful service but make sure you understand what they can and can’t do. They will not be able to reduce the vast majority of your debt, which would require an agreement with the creditor itself. In addition, the payment arrangements they make may fall short of the contractual amount due on your credit cards and other debts. These companies, even when they agree to waive late fees, will report to the credit bureaus the late payments that will be a result of the reduced payments coming from the credit counseling organization. In these situations, your credit history and credit report will show increased delinquency levels and your credit score will most likely drop further.

The idea of a nonprofit credit counseling program should be to help the consumer become educated about how credit works and provide counseling to help them handle their finances. They also provide services to help lower the existing debt wherever possible and work with creditors to lower your monthly payments. In many cases, you will pay one monthly sum to them and they will disburse payments to your creditors. There will be a fee for this service which will be added to your payment to them each month.

If You Want to Take the Next Step:

Understand Your Rights before you look for a credit counseling company. Most programs assess your financial situation, taking into account your monthly liabilities, expenses, and assets. They then work with your creditors to work out a payment schedule to pay down the debt. Once an agreement is in order, you will pay the credit counseling company a set amount each month and the company will in turn pay your creditors taking a piece of the payment as a fee. Just because an organization says it’s “nonprofit,” there’s no guarantee that its services are free, affordable, or even legitimate.

You can expect a start-up fee and a monthly maintenance fee, and although it may only be $10-$15, this can add up fast, adding to your debt. Beware of credit counseling companies who use your first payment as the total cost of the start-up fee, which could amount to several hundred dollars.

The reason most people sign with a credit counseling company to have them work with creditors to stop those recurring fees and new late fees and penalties. These companies may not do much more than that. You still need to make the painful decisions to cut your expenses – like turning off the cable service for a period or selling a second car and taking the bus. You will still pay old late fees, interest charges, and most of the original balances on your charge accounts, as well as whatever fees the credit counseling company charges.

Reputable companies can truly help those who are in danger of foreclosure and bankruptcy. Non profit debt consolidation programs may help someone get out of debt faster or help alleviate some of the difficulty in handling credit card and debt payments as well all help educate individuals on how to handle credit and debt. Credit counseling can help those with credit issues become more educated about debt and how it affects your life, and teach you how to stay debt free. This will hopefully show you how to avoid financial problems in the future. You will receive one-on-one advice from a certified credit counselor who will work with you and your budget to design a payment plan that is unique to your situation. Credit counselors know the particulars of creditors rules and policies. This gives them an inside track when it comes to negotiating with your creditors.

Individuals who are jeopardy of foreclosure or need to file bankruptcy can find a state-by-state list of government-approved organizations on the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees.

The term “nonprofit” does not mean free. Being nonprofit does not make them a better choice when it comes to helping you consolidate your debts. You should always do your homework and find the company and program that is right for you.

If you’re in trouble, but not on the brink of bankruptcy, consider working with your creditors directly to create a payment plan or try to consolidate debt on one single card at a low fixed rate. You’d be surprised at how many options are available to you if you take the time to look around and ask questions. The conversations are uncomfortable and debt consolidation is no fun, but remember banks and lenders want your business and will usually work with you.

This article by Maiane Cassanego first appeared on Sky Blue Credit Repair Reviews and was distributed by the Personal Finance Syndication Network.