How to Use a Credit Counseling Service to Get Out of Debt

What Credit Counseling Services Do

1. You meet with a credit counselor: At the initial meeting, the counselor will inquire about the type and amount of all of your debts. After the initial consultation, the counselor will ask you to submit an application that includes your personal information, as well as paperwork documenting the consumer debts you’d like the agency to help you consolidate.
2. The service creates a debt management plan (DMP) for you: Under the DMP, you’ll deposit a certain amount of money into an account set up by the counseling service. The service will then use that money to pay off your creditors month by month. The amount of your monthly deposits will include interest at a fixed rate that should be lower than the overall APR on the debts you’re consolidating.
3. The service negotiates with your creditors: Once you’re approved for a credit counseling program and have agreed to the terms of your DMP, the service will contact your consumer-debt creditors and attempt to negotiate better rates on your outstanding balances. You won’t be involved in these discussions at all.
4. You pay a monthly bill to the service: You’ll make one monthly payment—usually with one fixed APR— to the counseling service each month. They’ll use that money to continue to pay off your debts on an ongoing basis, usually over a period of 3–5, years depending on the amount of your debts and the APRs that the service was able to negotiate on your behalf.

Debtor Education

• A monthly repayment plan: A good credit counseling agency will work with you to develop a DMP before they take over your debt. That way you’ll be able to confirm up front that using their service will help you save money (by paying lower rates) and get out of debt.
• A debt-prevention plan: Most credit counseling agencies will continue to work with you after you get your loan to ensure that you don’t fall back into debt. For instance, they might help you develop a budget or help you get started saving and investing once you’re debt-free.

How Credit Counseling Affects Your Credit

• Working with a credit counseling agency will typically improve your credit score by eliminating your current debt and helping you get back on track with your payments.
• Creditors will often re-age your account once you begin making regular payments through the credit counseling service. Re-aging can involve canceling fees for late payments made before you entered counseling or agreeing not to notify credit bureaus about payments that you recently missed or made late.

How to Avoid Credit Counseling Scams

• Are you a nonprofit organization? Many for-profit services identify themselves as nonprofits. To be sure you’re working with a nonprofit, ask to see the service’s approval of nonprofit status, an official document issued by the IRS. However, nonprofit status does not guarantee a counseling service’s reputability. Many nonprofit counseling services have been accused of the abusive practices common among for-profit companies.
• Is the agency accredited? Confirm that the company is a member of the National Foundation for Credit Counseling (www.nfcc.org) or the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org).
• Are your counselors trained and certified? All credit counselors must go through official training and certification. Don’t work with an agency that doesn’t have certified counselors.
• Can I get regular reports about the status of my accounts? The agency that you work with should grant you access to your creditors (and the accounts that you have with them) at any time. That way, you can ensure that the credit counseling service is actually paying off your debts as you expect.
• What fees do you charge for your services? Nonprofit credit counseling services usually charge minimal fees. These fees should not exceed $75 for enrollment and $40 for a monthly payment. Don’t work with a service that charges higher fees.
• Are you a Better Business Bureau (BBB) member? Work only with companies that are BBB members. To check a company’s BBB standing, visit www.bbb.org.
• How are the counselors paid? Avoid companies that pay their credit counselors on commission. It’s likely that the counselors’ own financial interests will take precedence over yours.
• Do you have previous customer references? Many shady credit counseling operations display a binder full of “testimonials” from past customers. Don’t consider these testimonials to be sufficient endorsements.Instead, request the contact information of previous customers and contact them directly to discuss the agency’s services.
• Would your creditors be willing to work with the particular agency you are considering? Don’t ask the agency this question: ask your creditors.

How to Check Up on Your Account

• Arrange to receive copies of your statements each month, even if the service is paying your bills for you.
• Monitor your statements closely to make sure your creditors are receiving payments according to your DMP.