Credit Counseling, Not Online Debt Consolidation, Can Help You Help Yourself

If you're having trouble managing your money, you may be asking yourself: What will it cost me to get debt counseling? The question isn't just about money, either. Instead, this question delves into how it can affect your credit rating and your long-term financial standing.

It's not a simple answer. Credit counseling can help those with financial problems, but there is a cost, as it indirectly leaves a black mark on your credit rating. Here's a quick review of the good and the bad of credit counseling:

The pluses and minuses
First the pluses: Credit counselors, such as Consumer Credit Counseling Services or the Debt Counselors of America, can help you restructure your debt -- often with big concessions from creditors that you couldn't get on your own. That includes lower interest rates and forgiveness of penalties and overdue interest. In most cases, creditors also "re-age" your debt, a term that refers to listing overdue debt as current debt.

Now the minuses. First, all the credit accounts that are included in the repayment program are frozen. "It will be frozen until you complete the program, which can take two to five years," says Gerri Detweiler, education adviser of the Debt Counselors of America and author of "The Ultimate Credit Handbook."

Second, some creditors report your account as late. The counselors never report anything to the credit bureaus. But about 2% or 3% of the creditors will report that you are in credit counseling or that you're not abiding by the terms of your original agreement, Detweiler says.

Granted, it's a drag to get a negative report when you're doing your best to dig out of debt. But that shouldn't drive you from getting valuable help if you need it. "The perception that getting counseling will hurt you is very strong," Detweiler says. "For some people, it's an excuse not to do what you need to do."

If you need help with your bills, you can get a great deal of information from a counseling service before you decide whether to enter a debt-restructuring program.

Debt Counselors asks for a voluntary upfront contribution of up to $60 or $70, but will work with you for nothing. "Talking to a credit counseling agency doesn't obligate you to anything," Detweiler says. Like other counseling services, it's chiefly the creditors who pay DCA by allowing counselors to keep 5% to 15% of the money they collect as a commission.

Similarly, the National Foundation for Consumer Credit, which is the umbrella organization for 197 member offices with services in 1,435 communities, helps many debtors who do not enter the debt-reorganization program.

One-third are 'just terribly confused'
Celia Diehl, senior vice president at the national foundation, says one-third of the consumers who come for help don't need a restructuring program. "They are just terribly confused about how to handle their family budget and they have difficulty prioritizing their debt," she says.

Perhaps they don't know their rights as debtors or don't know how to handle calls from creditors. These people lay out their income, their bills and their assets and decide, with the counselor, how they can cut back on spending, what they might do to increase income and how they can turn the situation around, Diehl says. "These people find they can repay their debt on their own without any help from credit grantors."

Another one-third requires special concessions from creditors in order to make their plans work. They might need to get a reduction in minimum payments, for example, in order to dig out, instead of online debt consolidation services.

It's Diehl's job, as head of creditor relations, to work with creditors to get the concessions necessary to help debtors in this group get back on their feet. "We send them a proposal and say: `Your customer can afford this. Will you accept this plan?'"

The creditor also is asked to mark the account as "current." "Some will do it immediately and some will do it after three payments," Diehl says. But they will keep what she calls the "high-water mark," which means that if your account was at one time 90 days past due, it would say: "90 days past due, now current."

The final one-third needs help with more than just debt. "They need to restructure something in their lives to make things work better," Diehl says. "Maybe they need to get a second job or to move in with relatives. There may be gambling in the family and they may need to work with Gamblers Anonymous or Alcoholics Anonymous. They need help with those issues before they can address their finances."

Within this group is the 7% of consumers who simply can't work their way out of debt and must, instead, file for bankruptcy. Word is that credit counselors never advise consumers to file for protection from creditors via bankruptcy because credit granters pay them. Diehl says that's not true. "About 7% of the people we see need to speak with an attorney," she says.

Counseling and even online debt consolidation are preferred to bankruptcy
Naturally, Diehl believes it's better to work through your debt with a counselor than to file for bankruptcy. She makes a persuasive case for it, too. "People who come to us have an enormous amount of courage," she says, "because they really are laying out for a counselor the issues they have been grappling with."