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10 tips: Choose a credit counselor carefully

Are you reeling from the weight of credit-card bills, student loans or other debt?

By Laura T. Coffey, Times Correspondent
Published August 26, 2007

Are you reeling from the weight of credit-card bills, student loans or other debt? If your debt payments -not including your mortgage and car payment - have spiraled to 25 to 50 percent of your take-home pay, you might need some help to get the problem under control. A credit-counseling agency may be able to assist you immensely, so long as you're extremely careful about choosing the right agency:

1 Understand why your choice matters. A reputable credit counselor can help you repay your creditors at reduced interest rates, set up a personal budget and avoid bankruptcy. An unscrupulous agency can saddle you with bad advice and leave you with even more financial woes.

2 Avoid credit-repair clinics. Their TV ads promise: "We can erase your bad credit, 100 percent guaranteed!" But such clinics, which are different from credit-counseling agencies, often charge hundreds or even thousands to do what you can do yourself for free.

3 Point yourself in a better direction. You can check counselors' credentials and be connected to agencies that have made a commitment to certain professional and ethical standards through the National Foundation for Credit Counseling www.nfcc.org, toll-free 1-800-388-2227 and the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org , toll-free 1-866-703-8787 ).

4 Clarify what your counseling will include. A good counselor will sit down with you and discuss your financial situation in detail, devise a tailor-made action plan and provide you with ongoing support. A substandard counselor will ask you to fill out an application.

5 Inquire about the counselors' training. Your counselor should have a college degree, as well as courses in lending, credit, budgeting, saving, investing and bankruptcy.

6 Know what to expect. Before counseling begins, a good counselor will want to see your pay stubs, credit-card and loan statements and a filled-out form detailing your budget.

7 Ask how the agency and its staff get paid. The agency should reveal that it receives much of its income through contributions from creditors known as "fair share." In other words, creditors give the agencies a cut of the money they retrieve from you. If the agency's staff gets paid based on the services they sell you, consider going elsewhere. Ditto for agencies that make you to pay an up-front fee.

8 Make sure a debt-management plan is the best route. Be wary of agencies that push you into such a plan before reviewing your financial situation.

9 Stay on high alert for expensive mistakes. A counselor may tell you to stop paying your bills and send your debt payment directly to the agency. That can be fine - unless your creditors don't agree to the debt-management plan, or your agency fails to pay your bills on time.

10 Know what you're getting into. A debt-payback plan can take as long as two to five years to complete. If you miss any payments to the agency during that time - even if you're years into the process - the agency may require full debt payment.

Laura T. Coffey (laura@tentips.org)

Sources: Consumer Reports (www.consumerreports.org ); Financial Planning Association (www.fpanet.org ); Federal Trade Commission (www.ftc.gov )

[Last modified August 24, 2007, 20:05:39]