Debt Counseling Services: They Can Help You Reduce Credit Card Debt

For people who are in deep debt with little hope of getting out on their own, or for people who have a shaky credit history, a debt consolidation service may be the best alternative. You've probably seen television and print ads for these companies, promoting how they can reduce your payments by up to hundreds of dollars per month. How do they do it?

These services don't provide loans. They negotiate with your creditors to lower or eliminate your interest rates, allowing most or all of your payment to go toward balance reduction. Imagine shifting from 18% to nearly 0% interest immediately - and how much of a difference that would make.

You send one monthly payment to the service and they distribute it to your various creditors. Many programs will allow you to be debt free within a few years. If you're so far behind in your credit card payments that creditors contact you at home or at work to collect, enrollment in one of these programs will often require that creditors deal with your debt counseling service only.

Note that credit counseling services only work with consumer debt accounts: bank-sponsored (like Visa and MasterCard), department store, and gas credit cards. Mortgages, auto loans, student loans, and personal bank loans are not eligible.

Most services provide a monthly statement that shows exactly how your payments are allocated and how much your debt is decreasing. You will usually be required to pay by money order, cashier's check, or electronic funds transfer so the service can avoid the hassle of clearing checks. At this stage of your financial recovery, the last thing you need is for a check to bounce.

To enroll in debt counseling services, you'll be required to close the credit card accounts that you're consolidating. You may also be required to avoid applying for or using any credit during the repayment period. What's the point of a debt reduction plan if you continue to run up your debt?

Finding the Right Debt Counseling Service

First explore nonprofit companies. Nonprofits charge either no fees or small initiation and service fees for operating expenses. They can afford to charge so little because the participating creditors pay the costs of the service. Credit card companies view it as a wise investment because they'll be recovering their entire principal from cardholders instead of little or none of it from those who can't afford the full principal and interest payments.

For-profit services charge up to several hundred dollars in initiation, annual, and hidden fees, so it's best to avoid them if possible. Once you pay a deposit or enroll in the service, you may not be able to get a refund depending on the terms of the agreement. Enough excellent nonprofit services exist that you should not have to pay high fees for credit counseling.

What to Keep in Mind with Debt Counseling

When you find a service that you want to deal with, don't pay up front fees or finalize your enrollment until you're provided with a statement showing which of your credit accounts will be paid. Some of your creditors may not participate with credit counseling services, so make sure you know which ones will before you sign an agreement with a credit counseling service.

Also be sure you are aware of all fees, including interest charges, length of contract, refund policies, and monthly payment amount. Unless you agree with and understand all of the terms of enrollment, don't sign up until you're satisfied.

Keep in mind that the decision to enroll in a credit counseling service is a serious one. If you have a less-than-perfect credit report, credit counseling will not help clean up past mistakes. In fact it can work against you. When you're approved for a credit card you're entering into an agreement with the company to repay any debt you incur according to their terms.

If you have a credit counselor negotiate a new payment plan, the credit card company may consider it a violation of your terms and file it on your credit report. However, if you continue to make regular on-time payments to the debt counseling service, future creditors may consider that a positive.