When to consult with a credit counseling agency

Credit counseling agencies are non-profit financial institutions that offer professional assistance in the fields of debt management, bankruptcy consulting, budgeting and consumer credit helping consumers to lower their debt and improve their credit score. Following the current credit crisis and economic downturn, credit counseling has become a required step for many consumers who are not able to meet their obligations and are ready to file for bankruptcy. However, before filling for bankruptcy, a credit counseling agency may help you alleviate the burden of your debt and achieve financial freedom.

Although it may look like anyone who is in debt should consult a credit counseling agency, not all consumers need to do so. If you are in debt, but able to meet your obligations and rather on time, you certainly do not need credit counseling. Even if interest rates in your credit cards are high, you can negotiate a lower interest rate directly with your credit card companies without asking for the intermediary help of a credit counseling agency.

Consumers, who need full-scale credit counseling, typically face one, if not all, of the following situations:

> They fail to meet their credit card minimum payments;

> They are always late in their regular payments;

> They are chased by creditors and collectors;

> They fail in implementing reasonable payment plans with the creditors

However, consulting a credit counseling agency is not a panacea if your accumulated debt is too high. A credit counseling agency may negotiate lower payments with credit card companies on your behalf. If a lower payment is agreed, you will pay the counseling agency every month, which will then pay the credit card company. Yet, there are limits to how much lower payments your creditors will accept and the counseling agency may not be able to lower your payments low enough to get out of debt permanently. Besides, your payments should stretch maximum over the next two to four years. If repayment schedule takes more than five years, bankruptcy is typically your best alternative.

Some important considerations

Enrolling in a debt management program (DMP) requires that you credit is not already damaged. Credit counseling agencies will be informed by your creditors about your DMP and your credit score will be affected by your DMP record. To make sure your credit score is lowered you have to do timely payments.

Many credit counseling agencies require large set-up fees and upfront payments. Moreover, they may not be accredited by the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling, resulting in hurting consumers and affecting their credit score irreversibly. Besides, as the agency’s fees are covered by a percentage of the payments received by the credit card company, many people viewed credit counseling as another trick of the lending industry. Although this ‘fair share’ payment system has encouraged the development of credit counseling agencies, there were cases that agencies approached and hurt consumers, who hadn’t really fallen behind on their debt, thus causing the aggravation of both consumers and credit card companies. So, a thorough research is required before signing with a credit counseling agency to avoid any of these unfavorable circumstances.

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