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
Debt Consolidation and
Debt Settlement!
Please visit our
sponsor page if you are interested in learning more about Credit Counseling.
