Should You Have a Credit Counseling Agency Handle Your Debt Negotiations?

If you feel as if you’re faced with an overwhelming amount of debts, you could consolidate them through a credit counseling agency. There may be one near where you live or if not there are numerous ones available on the Internet. The best ones are nonprofits and charge very little or nothing.

If you decide to use a credit counseling agency you will need to be careful in choosing one. If you choose an agency that’s poorly run it could end up costing you money and doing very little to help you. If you do your homework and choose a reputable credit counseling agency there are still some things you should be aware of.

A third party will be making your payments

Regardless of the credit counseling agency you choose you will have a DMP (debt management plan) that will call for you to make a payment each month to the agency, which will then distribute the money to your lenders until all of your debts have been repaid. These agencies do not settle your debts and they don’t provide loans. The best ones have good working relationships with most financial institutions and can negotiate to get your interest rates reduced as well as many of your late fees waived. That way a larger percentage of your monthly payment will go towards reducing your debt instead of paying finance charges. Of course, if you have loans with creditors that won’t work with credit counseling agencies then the benefits you get through credit counseling will be reduced.

All DMPs are fundamentally the same

No credit counseling agency can get preferential treatment from your creditors. While the quality of credit counseling agencies can vary as can their employers all debt management plans are about the same. You will be assigned a credit counselor who will determine how much you’ll need to pay each month in order to pay your creditors in full in either 3 or more likely 5 years. Generally speaking, your fee will be about 2.5% of the total amount of your debt. Since you’re not signing a contract you can opt out of your program whenever you like. And whenever you have some extra funds you can pay extra and become debt free even quicker.

Counseling before consolidation

When you first get a credit counselor he or she should review your finances and may then offer some options besides a debt management plan. In fact, the time you spend with a compassionate and knowledgeable credit counselor should be motivating and enlightening. On the other hand, if your counselor seems judgmental, pushy or bored you should ask for a different one.

Debt consolidation through a credit counseling agency isn’t for everyone

Using a credit counseling agency is best if most of your debts are unsecured debts such as department store cards, personal loans, credit cards and sometimes accounts that have gone to collection. Unfortunately, if most of your debts are secured debts such as your mortgage or auto, motorcycle or boat loans there’s not much a credit counseling agency can do to help you. This is equally true if the majority of your debts are tax debts, student loan debts, spousal support, or unpaid child support. This is because these are all debts that can’t be negotiated. In addition, you must be convinced you’ll be able to make your payments for the 3 or 5 years and not for just a month or two. And you must have enough money left over to cover your essential living expenses and something you can put into savings.

You’ll lose your credit cards

One of the things the credit counseling agency will require of you is that you close all of your accounts and not get any new ones until you become debt free. This can be an awful adjustment if you’re used to using those little pieces of plastic on a daily basis. But it just makes sense. If you’re continuing to charge while making payments on your debt management plan you’re just basically spinning your wheels.

You’ll still have work ahead of you

You will continue to receive statements from your lenders, which you will have to monitor and then send to your agency. This is because the reports you get from your credit counseling agency won’t include the interest that you’re still being charged. So, if you don’t send in those statements the balances reported by your agency can be seriously different from what’s reported in the statements you get from your bank. Some credit counseling clients have been totally shocked when they believe they’ve paid off all their debts only to find they still owe thousands of dollars in interest.

Some lenders will view it negatively

Using a credit counseling agency will not affect your credit score as would a bankruptcy but some lenders will view it negatively. This is because some of your creditors will see that you’re making your payments via a third-party and view it as something of a danger sign. However, if you’ve been having a problem paying your bills then making payments on time to your credit counseling agency could actually help your credit reports.