The consumer's guide to credit counseling By Liz Pulliam Weston, moneycentral.msm.com  

Credit counselors are falling all over

themselves to help you out of debt,

but some do more harm than good.

Here’s what you need to know,

including whether you need it and

the red flags for rip-offs.

Debt counseling has become a $7

billion industry, but not all the players

are legitimate. The best credit

counseling can help people who are

behind on their debts get back on their

feet. Fly-by-night outfits can disappear

withyour money, and what remains of

your credit rating. In between the two

are a whole fleet of operators who

may or may not leave you better off

than you are now.


Typically, counseling services

negotiate lower payments with credit

card companies and other lenders,

then make the payments using a check

or electronic funds transfer sent to them

by the consumer each month.  Most of

the counseling services' fees are paid

by the lenders themselves, which send

back to the services a portion of the

payments received. This has led some

critics to charge that credit counseling

is just a tool of the lending industry.

The payment system, known as "fair

share," has certainly encouraged the

growth of credit counseling services.

And some agencies, driven by

competition, are now openly courting consumers who haven't fallen behind

on their debts by promising lower

interest rates. This development has

angered credit-card companies and

often hurts consumers, who may find

out too late that such plans can hurt

their credit ratings and are often

unnecessary.

What counseling can do to your credit:  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. Contrast that with a bankruptcy, which is viewed by almost all mainstream lenders as a huge negative on your credit report. What happens to your credit during counseling largely depends on how your lenders report your account to the credit bureaus.

First USA, the credit-card giant, reports its customers as delinquent on their bills until they make three consecutive payments of the new minimums negotiated by their credit services, said spokesman David Webster. Citibank, by contrast, simply adds 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. A simple notation about credit counseling probably won't. The credit score formula used by most lenders, known as FICO, now ignores any reference to credit counseling that may be in your file, said Craig Watts, spokesman for FICO creator Fair Isaac & Co. 

  Are you in danger?   You might think about credit 

  counseling if:

  • You can't pay the minimums on your credit cards.
  • You're consistently late paying one or more of your regular

     bills.
  • You're being hounded by creditors and collection agencies.
  • Your efforts to work out reasonable repayment plans with

     your creditors have failed.

  Be warned: 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,

  bankruptcy may be the best of bad options. Your payments

  also shouldn't stretch on for years. The typical plan takes

  two to four years to complete. Responsible credit counselors

  say bankruptcy is usually the better option if the repayment

  would take more than five years.

  What to watch out for: 

  Some do a good job of negotiating repayment plans. 

  Others charge fat upfront fees, pay their executives even

  fatter salaries and pocket much of the money that could

  be going to pay off creditors. An increasing number target

  people who aren't even late on their payments, but who are

  simply disgruntled about their interest rates. The worst

  aren't credit counselors at all. Usually billing themselves

  as specialists in "debt settlement," they promise to help

  you get rid of your debts for pennies on the dollar -- after

  you pay an upfront fee that can be $3,000 or more.

  Typically, by the time I hear about these companies,

  they've already absconded with people's cash,

  disconnected their phones and set up shop somewhere

  new with a different name.

  Investigate the company or service carefully before signing

  up. Red flags to avoid include:

  • 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.

  • No accreditation. Legitimate credit counseling firms are

    affiliated with the National Foundation for Credit Counseling

    or the Association of Independent Consumer Credit

    Counseling Agencies.

  • Delayed or missing payments. 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.

  • 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 affect on

    your credit rating and ability to obtain new credit.