Credit-counseling services have become widely popular over the last decade or so, and are suspected to continue their climb in popularity with the recent real estate meltdown. If you’re going to hire a credit counselor, however, you need to be aware of the risks. You can evaluate their abilities through insightful questions that will help you choose between your many options.
The most important thing you can realize is that the credit counselor doesn’t suffer if he doesn’t do his job right. Your credit, on the other hand, can take a major hit in its already dismal situation, which can set you back months (or even years). Before you hire a counseling service, ask these ten important questions.
1. Do you have a minimum on what I can owe?
Many credit counselors won’t even look at your file unless you owe a minimum to debt collectors. Since counseling services are paid on a commission basis—and earn more when they have to do more work—they don’t want to waste their time with clients who only owe $1,000 to one credit card.
Ask the credit counselor how much you have to owe to be considered for their client list. Very rarely will they adjust their rules for individual clients, so if the number they give is more than you owe, seek assistance elsewhere.
2. How are my monthly payments calculated?
Any credit counseling service you consider should be more than happy to give up their formulas for payment calculation. This is extremely important because you’ll only be writing one check per month—the counseling service will disperse those payments among your creditors. If you don’t ask where your money is going, you probably won’t know.
3. What if I can’t maintain the plan we devise?
There might come a time six months down the road when the agreed-upon payment schedule doesn’t work for you anymore. Perhaps you’ve had a baby and need to use the money to buy diapers, or maybe you have a few unexpected medical bills. Whatever the case, it is important to know if your credit counselor will help re-negotiate your monthly payments.
The point of using such a service is to find reasonable ways to manage your debt. If something changes your financial situation, a credit counselor should be willing to help you plan a new budget. You should also find out whether you’ll be charged a fee for this additional assistance, and how much it will be.
4. How do I know if creditors have received payment?
As mentioned above, you will write just one check each month to your credit counselor, which will then be used to pay off individual creditors. However, since you aren’t paying those creditors yourself, how will you know if the payments have been made? Unfortunately, some unscrupulous credit counselors will hold on to your money for 3-6 months while it gains interest in a savings orMoney Market account. Once it has accrued significant interest, they will use the principle to pay off your creditors.
This might be a great way for them to make money off you, but as your creditors go unpaid, your credit score plummets. Make sure that monthly payments will be made and that you have a way to verify it.
5. How do I check the status of my accounts?
Most reputable credit counselors allow their customers to check the status of their accounts by telephone or over the Internet. You use a password to access your information, which allows you to see how things are going. If a counseling service doesn’t offer this convenience, you might want to look elsewhere.
Unfortunately, some credit counselors are difficult to reach by phone, and might evade your calls if they are up to no good. Make sure you can retrieve data on your own account whenever you want; otherwise, you won’t know where your money is going.
6. Can you negotiate with my creditors?
Truth be told, you can negotiate with your creditors, but if you’re going to use a credit counselor, he or she might as well do it for you. By agreeing to a payment plan and making regular contributions to your debt, creditors are often willing to waive late fees and reduce (or even eliminate) interest as long as you’re paying up.
Credit counselors should be well-versed in this area, and should agree to take on the negotiating for you. If not, you’re probably better off on your own.
7. Are any debts excluded from the payment plan you propose?
In most cases, there will be at least one or two debts that your credit counselor won’t cover. There might be a conflict of interest, or they may simply not feel capable of handling them. Go over your credit report(s) in detail, and find out which you’ll need to take care of yourself. This way, you aren’t forgetting any debts, which could lead to further credit problems.
8. Will you help me create a plan?
Some credit counseling services will simply start paying off your debt at the agreed-upon rates your creditors provide. This is helpful, but it isn’t all they can do. If your credit counselor isn’t willing to help you create a repayment plan, complete with negotiating and budgeting, you can find more comprehensive help elsewhere.
Furthermore, find out if he or she will be willing to help you revisit your plan every 3-6 months. Since your financial situation can easily change in a matter of weeks, you need to know that assistance will be available when you need it.
9. Will you troubleshoot problems with my creditors?
A common problem that consumers face when trying to eradicate debt is the sudden change in plans that might ensue if your creditors create a problem. If they jack up the interest rates or tack on late fees that you didn’t incur, will your credit counselor take care of the problem, or will you be expected to do it yourself?
10. What steps do you take for security purposes?
If you’re going to use a credit counselor, you’ll be handing over personal information. Find out if the agency provides guarantees for your protection, particularly concerning your social security number and account numbers. If you can access your accounts online, for example, is the member’s area protected?
Trust Your Gut
Using a credit counselor might be the best way to eliminate your debt, but learn to trust your gut on these issues. If a representative makes your skin crawl or seems too insincere, you might not have found the right counselor for you. Since you’ll be discussing private financial matters, it’s important to trust him or her implicitly.