Credit Counseling and Debt Management Programs: Smart Idea or Huge Mistake?

Debt management services ads you hear on the radio can be very tempting if you’re

behind on several bills. But not all debt management companies are created equal – and if you choose the wrong

company to handle your debt management program, you’ll end up worse off than if you handled your own debt

management.

Here’s what to look for (and what to run away from) in any credit counselor or debt

management plan you’re considering using.

Questions for Credit Counselors

The U.S. Federal Trade Commission (FTC) and some state Attorneys General have sued

several credit counseling companies in the last few years for defrauding or deceiving their customers. And other

such companies have gone out of business, leaving their customers in the lurch.

To avoid these problems and protect yourself, the FTC recommends that you ask these

questions when choosing a credit counselor or debt management plan:

• Do they offer any free information? Beware of companies that charge for information about the services they

  offer.

• Are they licensed to offer credit counseling in your state? Many states do require such a license, and this

  information offers an extra measure of how reputable the organization is.

• What kind of training or certification do the company’s credit counselors have and from which organization?
• What do they charge for their debt management services? (Beware of high hidden fees!)
• Can they give you a formal written agreement? Don’t enter into a debt management plan over the phone – get

  those agreements in writing and keep meticulous records of your correspondence with the credit counseling company

  after you’ve decided to work with them.

Even if the credit counseling or debt management organization answers your

questions to your satisfaction, you should still check them out with the Better

Business Bureau and your state’s Attorney General.

Using a Debt Management Plan

After your initial consultation with a credit counselor, you may be advised to

enter into a debt management plan. The way this works is that the credit counselor or their organization works out

a lighter payment schedule for you with your creditors. In lieu of making your usual payments directly to your

creditors, you deposit a certain amount of money each month to the credit counseling organization and they pay your creditors

according to the schedule.

The FTC recommends that you stay vigilant when enrolled in a debt management plan.

Review your monthly statements to make sure your creditors are getting paid what they should.

Ultimately, because of the risk and cost of using a debt management plan, it’s

usually best to handle debt management on your own if possible. Contact your lenders directly and try to negotiate

lower interest rates or lower monthly minimum payments until your financial crisis passes. Do everything you can to

reduce your debt and protect your credit score – because after all, it’s your financial reputation and has a huge

impact on the major purchases you want or need to make.

And if you need advice with any part of the process, seek it from a government-

based or government-affiliated nonprofit organization. That’s the best way to play it safe and still get help with

debt management.