Seeking Help in a Crowded Field: Check Out Credit Counselors
Imagine getting stuck high atop a tree. A crowd gathers below you. People are shouting up, trying to talk you down. But you don't know whose advice to follow.
That's akin to where debt-laden consumers find themselves as they try to escape their financial predicaments, and a swelling legion of credit counselors clamors for their business.
Every three months, Americans break the previous record for bankruptcy filings, according to the American Bankruptcy Institute in Alexandria, Va. Household debt reaches a new height every six months, the Federal Reserve reports. Altogether, consumer credit debt amounts to more than $1.7 trillion.
One good thing about the pervasiveness of consumer credit problems is that the issue is attracting ample attention. Witness the plethora of e-mail spams and odd-hour TV commercials enticing you to get out of debt NOW! But with a proliferation of such offers comes a wider range in the quality of service available. And that means more work for the consumers who have to choose among them.
Consumers wantedWhen she got a new phone book recently, Kathryn Crumpton looked under "Credit & Debt Counseling Services." "Holy buckets! There were all these big ads and everything. Where do you go, where do you turn to for help when you want to find a credit counseling agency?" says Crumpton, who's counseling supervisor for Consumer Credit Counseling Service of Milwaukee. The agency is an affiliate of the National Foundation for Credit Counseling (www.nfcc.org), a nonprofit network with more than 1,300 locations.
"It's very confusing for consumers," agrees Gerri Detweiler, a consumer advocate and authority on credit matters (www.ultimatecredit.com). "There are at least hundreds of agencies out there and a lot of advertising going on that would make it confusing for consumers to know who to turn to that's good."
Beware of promises of quick-and-easy fixes.
The epidemic of credit problems has driven the growth of the counseling industry, but so has a proposal in Congress to require debt counseling for anyone who files for bankruptcy. Complicating matters for consumers, creditors have been cutting back on their financial support of such programs.
How it works
Typically, credit card issuers and other creditors--who stand to lose if consumers go bankrupt and don't repay their debts--support counseling agencies. Creditors often allow lower interest rates for consumers who enter debt management plans through counselors, and they pay the agencies a portion of the debts recovered.
For consumers, such arrangements can help them avoid bankruptcy, which could mean relinquishing possessions and tarnishing credit. Also, consumers ideally get an affordable monthly payment that, over the course of a few years, pays down their debts and teaches them to live within their means.
But creditors are scrutinizing their bottom lines and have been reducing the fees they pay to agencies and the concessions they make to debtors. Debt counseling may not be as good a deal as it was a few years ago, Detweiler suggests, which makes careful choosing all the more important to debt-laden consumers.
A wise choice is crucial to those in need of such help. At risk not only are the fees you pay but also the possibility that the group you hire to help you might worsen your credit woes. For instance, consumer watchdogs have been warning against agencies keeping a customer's first monthly debt payment rather than disbursing it to creditors, thus resulting in added delinquency and late fees for the consumer.
Be sure the counselors disburse your payments.
Beware of thieves
Even worse, by providing confidential financial information to the wrong people, you could be setting yourself up for the exceedingly slippery peril of identity theft. You need to pick your debt counselor more diligently than you'd choose a plumber to unclog a sink. Start by asking for recommendations from people you trust, including associates at your credit union. Check for complaints with the Better Business Bureau and your local consumer protection agency.
Once you've found some counseling groups that seem suitable, here are some questions to ask:
What do they expect from you? The easier it sounds, the more skeptical you should be. It's not a matter of just taking your money and keeping creditors off your back. Helpful agencies also should be working with you to understand how you messed up your finances and how you can prevent it from happening again. "Part of it is just a gut feeling when you're talking to them," Detweiler says. "Are they really trying to help you solve this problem or are they just trying to push you on a payment plan?"
To whom are they accountable? Ask what trade associations they belong to and what accrediting organizations they answer to. If they have reputable groups behind them, you'll have added assurance of their legitimacy.
How are they supported? Find out clearly how much you'll have to pay. But also ask what kind of arrangements they have with creditors. And if they receive contributions from a local charity, that's one more group to which they're accountable. Crumpton's agency is part of the United Way and usually charges a set-up fee of $25 with monthly fees ranging from $1 to $15, depending on ability to pay.
More credit counseling offers means more work choosing.
How do they intend to help you? Again, beware of promises of quick-and-easy fixes. Expect a thorough examination of your earning capability, credit history, budget, and whether you could sell off assets to pay down debts before arranging an affordable monthly payment plan. "A counseling program can be an excellent assistant in your plan to get out of debt," Detweiler says. "But you should also expect to take a look at your spending and your income and be willing to make some changes because that's the only way you'll be successful."
How are they qualified to help you? The more professional your counselor, the better. Look for financial training and knowledge in budgeting, credit, and bankruptcy.
Where can you learn more? Before committing, ask for more detailed information via Web sites, publications, and references. Beware of high-pressure pitches to get you to sign up right away. Legitimate agencies shouldn't mind your thoroughness.
Some of the trends behind the growth in the credit counseling industry may be short-term, but the need for such services isn't going away.
"There are always going to be people that have problems, because we go through divorces, we have illnesses, we get laid off from jobs. There's always going to be something that affects your finances," Crumpton says. "I think there's always going to be a need--unless credit cards totally disappear."
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