How can credit counselling help you?

How does credit counseling work?While credit counselling can help many get back on track with their credit card debt, it isn't for everybody.

Most of us use credit cards the way we're supposed to. We don't put more on our credit cards than we can pay off in one or two payments, we keep up with our monthly credit card bills and we're keep an eye on our credit reports. But some of us get into situations where our credit card debt seems overwhelming, and we feel as if there's no where to turn. If you find yourself in such a situation, you may want to consider credit counselling before even thinking about pursuing bankruptcy.

"Before seeking any outside help, it's always best to see what you can do on your own first," says Bill Christie, a retired personal financial adviser and accountant. "Some folks get those bills in every month and become overwhelmed when creditors are asking for money from all directions. There are things such as paying off and getting rid of extra credit, or credit that isn't being used, or even consolidating credit, before seeking counselling. For some people, it's more a matter of organization than being in trouble."

But if your financial situation is in trouble, it's not a bad thing to seek outside advice, as long as you do your research. There are some companies or agents who prey on those in financial trouble because they know such people will do anything to get out of it.

"A few years ago, credit counsellors created the mental picture of the slick guy sitting behind the desk willing to give you a loan to pay your debt, but with the hook of a massive interest," Christie says. However, a truly helpful credit counsellor is "a person to turn to who can offer useful advice, options and resources."

Similar to a bankruptcy lawyer, the credit counsellor acts as a go-between for the creditors and the individual to arrange a fair monthly amount that the individual can afford and the creditors agree to. The counsellor's fees are paid from a portion of these monthly payments. Critics of this system say that counsellors are basically working for the lenders for this reason. Christie doesn't agree.

"The counsellors or lawyers need to get paid, too," he says. "But they don't ask for additional payments or upfront fees, they take their part of the divvy -- that's it. But consumers must be careful because this isn't a bankruptcy. The person has to make those payments as they will be reflected on the credit reports. That's the main reason the consumer needs to be careful who sets this up for them."

What this means is that for those who are too far in debt, there may not be a payment amount set low enough to make a difference. So, in the end, the individual may end up making the situation even worse.

Can credit counselling help? And is it better than turning to bankruptcy?

"There are stories where such counselling helps and some where it's made things worse," Christie says. "It all depends on how such things are reported to the credit bureaus. Some credit lenders still consider a person in arrears until a few consecutive payments have been made, usually two or three. Even then, it may still show up on the credit reports that you were in arrears, so really it doesn't erase the problem. But it does show willingness to make up for it."

And some lenders are more willing to deal with a person who's gone through credit counselling and met their end of the bargain before they'd deal with a person who has gone the bankruptcy route. A good thing to remember is that being in arrears can be purged after a few months to a year of fixing things; a bankruptcy can stay on your reports for up to 10 years.

Before hiring someone to help you, though, Christie suggests the following things to watch out for.

Fees. Most consumer credit counselling services typically charge a nominal set-up fee. If you're being asked to pay a lot more, you may want to keep looking. Ask what those fees are for before handing over anything. If they can't justify it, don't hire them.

Accreditation. According to Christie, legitimate credit counselling firms are affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. If the person or agency you're speaking to can't tell you they're affiliated with these associations, look elsewhere.

Payments to creditors. Find out how much of each monthly payment you make will be going to your creditors, and when it will be sent to them. The reason this is important is because some credit counselling companies hold onto the first month's payment as a fee. Understand this because you don't want to make promises to creditors, only to have them asking where that first payment you promised them is.

Unrealistic promises. Legitimate credit counselling services can help you pay back what you owe, but they can't repair what's been done.

Credit counselling may not be helpful for everyone with high debt, but it is an option. But, as Christie says, "People need to proceed with caution before taking steps with credit counselling so they don't make their current situation even worse. There are no easy solutions, but there is help in getting back on track."

Written by Lily Wolf.

Published August 26, 2009

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