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  • A large amount of credit card debt can be overwhelming, but there are many services that offer credit counseling and debt reduction services. It is important to do your due diligence with these companies. There are reputable ones, and there are others seeking to prey on the desperation of those in a financial bind.

    What a Credit Counselor Does

    Understanding what a credit counselor does will help you weed out the impostors. A company that provides advise on managing debt, works with your to develop a realistic budget and provides financial education seminars is a credit counseling company. True counselors help you develop a plan that works based on your situation and usually only takes two to three sessions to develop a plan. The fees should be per session and not based on a percentage of your debt. A debt management or reduction company goes beyond credit counseling. They don't just educate you, they help you pay your unsecured debts. Unsecured debt is anything that was obtained without collateral such as credit cards, medical bills and student loans. Often these companies work with your creditors to negotiate lower balances and interest rates. Debt management companies do this for a fee, often a percentage of your total debt when you walk in the door.

    What to Ask

    You may be able to find a reputable credit counselor through referrals from family or friends. However, many people don't feel comfortable sharing that they are experiencing financial troubles. If you feel this way, don't be shy about asking a lot of questions when choosing a credit counselor or debt counselor. Know what the fees are and when they are paid. Fees should not be paid until the services are rendered. With debt reduction companies, you should see progress before you pay money. If the company claims to be a non-profit, request a copy of the IRS non-profit approval letter. If employees are paid a commission, red flag the company and move on. Know how long the agreement is for and what services the company provides. If it is a debt reduction company, you should have a time frame where you can expect to have your debts paid off, usually 48 months. Request to see the state license authorizing the company to render services in your state. Not only will a reputable debt reduction company be able to reduce debts, it should be able to negotiate with creditors to "re-age" your debts, making them current after so many payments. Once you have established that a company is operating legally and has the reputation and ability to perform the services you need, you must then determine if the price is worth the service.

    Warning

    Avoid companies that tell you to stop communicating with creditors or advise you to stop making payments completely. A company that guarantees they can remove unsecured debt is a fraud. Never pay a percentage of your savings to a company. No company can guarantee removing bad credit nor can they honestly assure you that using them will have no adverse affects on your credit. Even after your plan is set in place you should always make payments to your creditors, not the credit counselor or debt manager.

    Source:

    Federal Trade Commission: Choosing a Credit Counselor

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