Getting Help Springing the Debt Trap

Lewis Schiff

Question of the week:
We've really gotten in over our heads with our credit cards over the last couple of years, and are starting to consider going to a consumer credit counseling agency for help. Do you think this is a smart move? --A.T., Wisconsin

Dear A.T.,

According to the Consumer Federation of America, approximately nine million Americans have some contact with a consumer credit counseling agency each year. When we asked members of the Armchair Millionaire community about their experiences going to an agency for help, we generally heard positive responses. Here are two:

A lifesaver. "I got left with $10,000 debt after a divorce. Consumer credit counseling was a lifesaver! Half my debt was interest free for the four years it took for me to pay it off and the other was dropped to 8 percent. Afterwards, when applying for a mortgage, it came up, but when I explained it they had no problem." --Meg H.

Do it yourself and save the fee. "I'm in the midst of paying down significant debt right now. I've used a consumer credit counseling agency and it worked out fine, but then I realized I could do it myself and save the fee the agency was charging me. Every little bit helps when trying to pay off debt." --Jenny

A good credit counseling company will work with you to create a debt management plan and with your creditors to create repayment plans and in some cases, to lower their interest rates. They should also provide financial education to help you improve your overall financial picture and help you to not get back into debt again.

But you should be aware that the credit counseling industry has come under fire recently from the IRS, the Federal Trade Commission and other groups for allegations of excessive fees and deceptive marketing. This doesn't necessarily mean that you shouldn't seek help from a credit agency, because there are hundreds of reputable agencies who have helped thousands of people.

What it does mean, however, is that you need to check into an agency very carefully before choosing to work with it. My guide tells what to look for.

The Armchair Millionaire's Guide to Consumer Credit Counseling

• Fees. Fees vary from agency to agency, and you should look for a good deal. According to the Consumer Federation of America, you should avoid fees higher than $50 to set up a debt management plan and monthly fees higher than $25. And the agency should be upfront about their fees, providing you specific prices in writing.
• Services. Does it offer more than just help creating a debt management plan? You may also want budget counseling want debt counseling and other financial education. You may also want the option to work with a counselor not just in person, but also on the phone or over the Internet.
• Your best interest. Credit counseling agencies are supposed to operate with your best interest in mind, but not all do. Look out for agencies where employees are paid by commission, or that doesn't spend enough time with you to formulate a solution that will work for you. And don't assume that just because an agency has non-profit status that it's automatically looking out for your best interest.
• Advertising. Be wary of agencies that advertise aggressively through telemarketing or that make unreasonable promises to "repair" your credit. While the best way to find a good agency is generally through referrals from friends or family members, you should also check out any agency you're considering with your state attorney general's office or Better Business Bureau to find out if any consumer complaints have been filed against it.

THE BOTTOM LINE: It's not easy to ask for help when you have more debt than you can handle. But it can be the way out of the debt trap--provided you ask for help from the right credit counseling agency.

From "Ask the Armchair Millionaire" featured each week on CNNMoney

For more Lewis Schiff articles and resources, click here.

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