If you’re living paycheck to paycheck, struggling under a mountain of debt, and think “budget” is a dirty word then you may be in more trouble than you care to admit. The longer you wait to realize you’re in trouble, the harder it is to get out of it, and it may even lead to bankruptcy. Since bankruptcy isn’t a desirable option, unless you have no other choice, it’s time to consider what you can do to make a difference.

Personal Credit Counseling

Many people have turned to personal credit counseling in order to get out from under a mountain of debt or just learn the basics of consumer finance. However, as many have quickly learned, not all credit counseling organizations are created equal. While there are some perfectly legitimate organizations that do provide counseling services to people, there are also fraudulent companies that do nothing more than pocket your money. But, if you know how to choose a reputable company and exercise a bit of caution when dealing with them, you can certainly benefit from the services they provide.

Credit counseling is, first and foremost, an option to learn the basics of consumer finance. If you’re struggling because you don’t know how to make a budget or you have poor money management skills, a licensed counselor can help you overcome these challenges. It’s not ALWAYS about creating a debt repayment plan, and it shouldn’t be the counselor’s primary focus when speaking to you. If it’s an appropriate option for you, then the counselor will suggest it; however, it’s not for everyone.

Choosing a Company

When choosing an agency, the first thing you want to look for is whether or not they are a member of the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). These are the largest and most respected networks of consumer credit counseling agencies and are put through a rigorous accreditation. Companies with this accreditation have been carefully reviewed in their operating procedures for the agency as a whole, as well as their effectiveness as counselors.

Legitimate credit counseling companies provide budgeting and general money management advice to help prevent any future debt situations. In addition, they can work with lenders to get rid of late fees, extend the term on loans, and/or lower your interest rates if you decide to create a debt management plan. In doing so, they enable you to make comfortable payments while still working to pay off the debt.   Many of these companies are nonprofit, but just because they’re nonprofit doesn’t mean they’re all free, or cheap, for that matter.

Credit counselors are trained in all matters of consumer finance, including money management and budgeting. Their job is to discuss your entire financial situation and help develop a personal plan that will get you to debt free and financially secure as quickly as possible. But don’t think of this as a “get out of debt quick” kind of deal. It still takes a lot of work, and often, quite a bit of time to do it.

Note: A reputable company will send you free materials about itself and its services without requiring more information about your situation. If they do not, consider this a warning flag and move on to another company!

Once you’ve narrowed your search down to a couple of companies that you are interested in, the next step is to see what types of complaints have been filed against them and how they were handled. You can check your state’s Attorney General’s Office or the Better Business Bureau. Each of these sources can provide the details of complaints filed against any of the companies you have selected, along with the outcome of the dispute. But, be aware that just because there are no complaints filed against a company, it doesn’t mean it’s necessarily a legitimate company. Do your due diligence. To get you started, the U.S. Trustee Program has a list of approved agencies that provide pre-bankruptcy counseling.

Asking The Right Questions

Because this is such a personal situation, you want to find a counselor that suits you and is going to fit your needs. As such, it’s important to ask the right questions. The following list of questions was found from the Federal Trade Commission’s (FTC) site:

• What services do you offer?

The counselor could be a great individual and highly knowledgeable, but if they don’t offer the services you need, then you’re wasting your time and theirs. The most effective companies are those with a wide range of options from budgeting tips and free seminars to personal debt management plans. It’s best to avoid companies that push for debt management plans right off the bat, without knowing your situation.

• Do you offer free information?

Basically, you’re looking to see if they offer any educational materials and whether or not they’re free. Avoid companies who charge for information.

• In addition to helping me solve my immediate problem, will you help me develop a plan for avoiding problems in the future?

If you’re seeking the help of a professional, it’s probably because you need help figuring out a plan – both immediate and long-term. You want a company that will help with both areas. It does you no good to fix the problem now if you don’t take steps to prevent it from happening again.

• What are your fees? Are there set-up and/or monthly fees?

As I mentioned earlier, just because these companies are nonprofit, doesn’t mean they’re free. You want to know what they charge in full detail. If it’s possible, get a quote in writing before making a decision. If they refuse to give you a specific quote, move on. There are plenty of companies that will.

• What if I can’t afford to pay your fees or make contributions?

In some instances, credit counseling agencies will not “charge” you anything for their services, but they do ask that you make a contribution. But, even if they charge you, you need to know whether this company can help you or not. If you can’t afford their prices or contribution requests, see if it’s negotiable. If not, then move on.

• Will I have a formal written agreement or contract with you?

Make sure you read the fine print, and always read the entire contract prior to signing it. Don’t take someone’s word for it, get it in writing. When it comes to dealing with your credit and giving someone money to make your payments for you, make sure you know what’s going on and what exactly they’ll be doing.

• Are you licensed to offer your services in my state?

If you’re going with a local agency, then you could probably skip this question – though I still recommend asking whether they’re licensed or not. However, for national companies, it’s very important to find out if they’re even able to help you. Each state has different rules and requirements for counseling companies, so be sure they’re licensed in your state before beginning a program with them.

• What are the qualifications of your counselors?

Remember, counselors should be specifically trained and licensed to handle consumer finance. Find out if the company’s counselors were certified by an outside organization and what kind of training they’ve received. It’s better to go with a company that has their counselors certified by an outside organization as there is at least a third party to verify the counselor is knowledgeable and skilled enough to assist you.

• What assurance do I have that my personal information will be kept confidential and secure?

Every company should have a privacy policy, as well as, an opt-out policy if they share information. Find out about it upfront, and if you don’t want your information shared, learn what needs to be done in order to opt-out.

• How are your employees compensated?

I realize this may seem like a strange question, but if a company’s employees are paid more for you to sign up, pay a fee, or make a contribution to the company then it’s all the more reason for them to pressure you into signing up. This isn’t something you need when trying to deal with getting out of debt, so consider it a flag.

Debt Management Plans

It is important to understand that debt management plans by themselves are not credit counseling. It is a step that counselors may recommend in the course of talking to you; however, this may not even be something you need. You should only consider a debt management plan after you’ve thoroughly discussed your situation with a licensed counselor, and even then, they should still be working with you to help create a budget and teach you money management skills.

How It Works

Theoretically speaking, you can do the same thing a counselor can do for you. You have the ability to negotiate with your creditors to get rid of late fees, extend loan terms, or reduce interest rates, but the reality of it is that sometimes you may not be as effective as a counselor.

In all cases, just be honest with yourself. If the reason that you are in your current situation is due to poor money management and spending problems, then you may not be comfortable enough to handle the issue yourself. In that case, having a debt management plan may be the best option for you.

To start a debt management plan, you “deposit” money each month with the credit counseling agency. The agency then uses your deposit to make your payments based on the debt schedule your counselor worked out with your creditors. A successful debt management plan will require timely payment and can take 48 months or longer to complete. This program is usually for those who are facing large amounts of debt. However, the downside (or up, depending on which way you look at it) is that most agencies may require that you agree not to use or apply for any new debt while under the management plan.

Is Debt Management Right For You?

Along with the questions you should be asking about the companies in general, there are a list of questions you should ask about debt management plans in order to determine if one is right for you.

- Is a debt management plan the only option you can give me?

- How does your debt management program work?

- How is the amount of my payment determined?

- How often can I get status reports on my progress?

- Can you negotiate with my lenders to lower interest and/or waive fees?

- What debts aren’t included in a debt management program?

- Do I have to make any payments to my creditors before they will accept the proposed repayment schedule?

- How will enrolling in a debt management plan affect my credit?

- Can you get my creditors to make my accounts current?

Again, this list can be found on the FTC page.

The Verdict

Personally, I think credit counseling agencies are great for people who need a little help building a budget and/or learning money management skills. If you feel you need the debt management program, then go for it. I feel like most of them are pretty restrictive, but I suppose that’s the point. In either case, just make sure you’ve considered your options and looked at everything carefully so you’re not being taken advantage of.

It is always a good idea to follow up with your creditors to make sure that your payments were made and that everything is as it should be. Keep track of what is going on and ask for regular updates on your progress. Don’t just dump this into your counselor’s lap and hope that all ends well. Take responsibility for your credit and be involved!

What do you think of personal credit counseling? Have you or someone you know been through it? How did you find the experience?

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