Income down, bills up. Time for credit counseling?An accredited professional will help you consider all options By Todd Ossenfort
Dear Credit Guy,
I
have approximately $19,000 in credit card debt. My income was recently reduced,
and although never late on any payments, the debt is causing severe stress. If
I work with a credit counseling agency to make payments to my creditors, how will
this affect my credit score? I don't want to shirk responsibility, but the
stress is overwhelming ... what are my options? Thanks very much!
-- Kelly
Dear Kelly,
Seeking
help for your credit card debt is not shirking your responsibility. Working
with an accredited credit counseling agency will allow you to learn more about
your options for improving your financial situation, and you may simply be
provided with a structured plan for repaying your debt in a reasonable amount
of time.
The
most important reasons to seek professional help for problem debt is to learn
more about how you acquired the large amount of credit card debt, what you can
do to avoid such problems in the future and the best options for repaying your
debt in the shortest period of time. There are two large,
respected accrediting agencies that offer credit counseling. I am a member of
the board of one, the Association of Independent Consumer Credit Counseling
Agencies, and I hope you use its services. The other major
accrediting agency is the National Federation for Credit Counseling.
When
you meet with a certified credit counselor, you will be asked to provide all
your financial information so that the counselor can recommend the best course
of action for you. By being honest with your counselor about your spending
behaviors and financial actions, the counselor will be able to put together a
list of recommendations that best fit your situation. You will also be provided
with a workable spending plan that will help you get out and stay out of
unwanted debt.
Debt management plans
One
possible solution for you may be a debt management plan (DMP). If, with your
reduced income, you qualify for a plan, the credit counseling agency will
negotiate with your creditors on your behalf to help lower your monthly
payments. You will make one payment to the credit counseling agency and the
agency will disperse the payment to your creditors.
Generally,
when you are placed on a DMP, your accounts are closed and a notation is included
on your credit report that the account is in consumer credit counseling status
or is being managed by a third party. The FICO credit scoring model does not
factor the notation on your credit report into your score. However, some
potential lenders view the notation as a negative.
Since
you are not currently late on any of your accounts, you may be able to pay off
your creditors yourself without entering into a DMP. Sometimes all that is
needed is for an unbiased, emotionally uninvolved third-party to point out negative spending habits and how to better manage your income.
In
some cases, people who seek help from a credit counselor do not have enough
income to manage their debt loads and they are generally referred to an
attorney for bankruptcy advice. I hope that will not be what happens in
your situation. If it is, don't consider it a shirking of responsibility. I
recommend exhausting all other efforts before filing bankruptcy, but the reason
we have bankruptcy laws in this country is because sometimes it is necessary to
receive help with debts and get a fresh start.
Take
care of your credit!
See related: Check out credit counselors credentials first
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.
Published: February 2, 2009
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