You want to get out of debt, but you're not sure which option is right for you. Should you speak to a credit counselor, get a debt consolidation loan, have your debts settled for less, or just file bankruptcy Well, this page is dedicated to explaining what consumer credit counseling is and what it does. You do have other options.
Seeking out your options is the first step to a smart solution. Doing nothing or ignoring those annoying creditors will only make matters worse. Congratulations on taking that first step. You can get out of debt.
Are Consumer Credit Counseling Services (CCCS) Right for Your Situation?
If you’re able to pay your bills and are current on all your accounts, you almost certainly don’t need credit counseling. If your interest rates are too high, you usually can negotiate a lower rate with your credit-card companies just by asking -- or threatening to move your account elsewhere.
You may want to consider credit counseling when you've failed to work out a reasonable plan with your creditors, you can't meet the minimum required payments on your credit card, you are late month after month paying your regular bills, or collection agents are constantly calling you. However, if you’re too far in debt, credit counseling may not be able to help. There are limits to how little your creditors will accept, and a credit counseling service may not be able to cut your payments enough to either give you breathing room or get you out of debt. If that’s true, personal bankruptcy may be the best of bad options. A responsible credit counselor will quite often suggest bankruptcy if you cannot repay your debt within 5 years --a typical plan should take between 2-4 years to complete.
As with any service, you should investigate the company you are considering doing business with.
Legitimate Consumer Credit Counseling Services Offer...
With the increase in consumer debt, there are more and more credit counseling agencies popping up all over the place --on the internet, around the corner, some sincerely and legitimately there to help you find financial freedom. But there are others, just as in any industry, who are there to get rich.
They do not charge big upfront fees. Consumer Credit Counseling Services typically charge a $10 set-up fee. If you’re paying a lot more, you may be the one who’s getting set up, unless you’re getting extensive and personal money coaching that could justify the fee.
They do not hold your first payment as a fee. Some companies pocket your first months’ payments as a fee, rather than passing the money on to your creditors. Missing payments can hurt your credit rating. Find out how much of each monthly payment is going to your creditors, and when it will be sent to them.
They do not make unrealistic promises. Some companies falsely promise that you can settle your debts for little or no money, without hurting your credit rating. Legitimate credit counseling services help you pay back what you owe, albeit at lower interest rates, and acknowledge there may be some effect on your credit rating and ability to obtain new credit.
They are accredited with the NFCC or AICCCA. Legitimate consumer credit counseling firms are affiliated with the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCA).
Their counselors should be trained and certified. Legitimate credit counseling firms have counselors who are trained and certified by associations such as the Association for Financial Counseling and Planning Education (AFCPE).
They will offer free information about their services. A reputable credit counseling agency should send you free information about itself and the services it provides without requiring you to provide any details about your situation. If a firm doesn't do that, consider it a red flag and go elsewhere for help.
You should also check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau. They can tell you if consumers have filed complaints about them. (A company with no complaints on file does not necessarily mean they're legitimate.) Also beware that all companies who hold themselves out as "not-for-profit" agencies are not necessarily legitimate either.
NFCC or AICCCA Membership
The National Foundation for Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA) are industry associations that require extremely high standards for all of their members. If the agency you are dealing with is a member in good standing with either of these associations, it is a good sign that they are properly accredited and have certified counselors because the associations require it.
Consumer Credit Counseling Services versus Personal Bankruptcy, Is One Better Than The Other?
You may have heard that credit counseling will trash your credit report or even that it’s “worse than bankruptcy.” Neither is really true. Credit counseling may have some effect on your credit, or it may have none at all. Some lenders may not want to do business with you after you've completed your plan, but others will. Bankruptcy, on the other hand, most certainly will adversely affect your credit. You most likely will be able to obtain credit, but for a very high "price" (extremely high interest rate and/or a required annual fee)
What happens to your credit during counseling largely depends on how your lenders report your account to the credit bureaus. Some lenders will report their customers as delinquent on their bills until they make a number (3-4) of consecutive payments of the new minimums negotiated by their credit services. Yet, others, by contrast, simply add a note to the credit bureaus’ files that the customer is enrolled in credit counseling.
Being reported as late or delinquent can certainly hurt your credit score, the three-digit number widely used by lenders to determine creditworthiness. A simple notation about credit counseling probably won’t. In an MSN Money article Beef Up Your Credit Score it states:
"Don’t be afraid of credit counseling. If you’re overloaded with high-interest debt and are in danger of falling behind on your payments -- or you already have -- consider working with a nonprofit agency such as Consumer Credit Counseling Service to set up a debt repayment plan....
Contrary to what you might have heard, credit counseling probably won’t hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt-repayment plans were no more likely to default or go bankrupt than other consumers.
'Today the FICO [Fair Isaac Corp, founder of the credit scoring system] score ignores any and all references in a credit report to credit counseling or debt management programs,' Watts [ FICO consumer affairs officer] said."
The fact that FICO ignores any reference to credit counseling that may be in your file is great news for those of you haven chosen this path to rescue your wallet from credit hell. Some lenders say they even view credit counseling as an encouraging sign that a customer is getting his or her debts under control. Citibank, the largest issuer of credit cards, says people who have fallen behind on their payments often improve their status in the company’s eyes by enrolling in -- and sticking with -- a debt repayment plan.
There are still some lenders who refuse to deal with anyone who has enrolled in credit counseling. And if you fell behind on your payments before you entered credit counseling, you’ll find those late payments will still affect your credit score even after you’ve paid off your debts.
Your Prescription for Better Financial Health