Credit counseling and debt management services can be a financial lifesaver. Credit counseling agencies may arrange a debt repayment plan; a creditor approved arrangement that allows consumers to repay unsecured debts at reduced interest rates. In these plans, consumers deposit money each month with the counseling agency. Deposits are then used to pay creditors according to a payment schedule the counselors develop with the consumer.
As part of the repayment plan, consumers may have to agree not to apply for, or use, any additional credit while participating in the program. A successful plan requires regular, timely payments and could take 48 months or longer to complete. Some credit counseling agencies charge little or nothing for managing the plan; others charge a significant fee over time. Under state and federal law, credit repair companies are prohibited from charging or accepting advance payment for their services.
Consumers should read contracts carefully, looking for voluntary payments made to the agency, which can often amount to the consumer's entire first payment to the agency, or a fee per account worked by the agency. In addition, consumers should inquire as to how long it will take for creditors to receive the initial payment from the credit-counseling agency and should continue making payments to creditors until they have been notified that the creditor has accepted the repayment plan.
A debt repayment plan does NOT erase credit history.
In addition, under the Fair Credit Reporting Act, agencies are required to inform consumers that accurate information in a consumer's credit record may NOT be permanently removed and may stay on your report for up to seven years. In fact, creditors may report an account in financial counseling as payments missed, or as write-offs. But, a demonstrated pattern of timely payments should help you qualify for credit in the future.
When considering a counseling or debt management agency be sure to ask about the following:
*Is the company properly licensed? Don't take the company's word for it; it is the consumer's responsibility to verify the information.
* Are there voluntary payments to the agencies written into the contract? If so, do you wish to pay them; if not how do you avoid these voluntary payments?
*Will they devise a plan tailored to fit your needs?
* How long will it take the agency to distribute payments to your creditors after it has received your check?
* Are the agency's services confidential?
* Are budget and credit education opportunities available?
* Will your funds be protected? How?
* Is the agency accredited?