Reaching out to a credit-counseling service can land you further in debt if you mistakenly choose one that is interested only in taking your money.
It's getting tough to tell the good from the bad guys these days, especially when you're getting bombarded with advertisements promising to dig you out of debt.
The Better Business Bureau has reported a sharp increase in complaints about the credit services since 1998. The credit-counseling agencies all promise to whip the fiscally unfit into shape. The question is how many of them can help.
Calling the credit cavalry. You might not even need someone to bail you out. "I tell people that almost all of us could use a good old-fashioned budget session," said Catherine Williams, vice president for financial literacy for Money Management International of Houston. "Most people spend a lot of time researching and picking out the best computer or MP3 player, I just wish they would do the same thing with their finances."
If you have fewer than three credit cards and have been able to make the minimum payments on each for at least two consecutive months while juggling all your other expenses, you probably need a good money manager, not a debt-consolidation loan, to help you straighten out your debts. That money manger can also help you create a budget that you can stick to and keep yourself out of debt.
You might want to try negotiating with your credit card companies for better payment terms such as lower interest rates or a waiver for late fees if you have two or three outstanding debts. Working with a credit-counseling service doesn't always guarantee a better deal with your credit card company. Some issuers won't budge for anyone.
But if you've been struggling with bills, collectors have been breathing down your neck and no creditor wants to cut a deal, a visit to a credit-counseling agency might do some good.
Telling the good from the bad. Reputable agencies should offer you a free financial review, preferably in person, before discussing payment solutions. Watch out for anyone who mentions a debt-management plan within 20 minutes of your first meeting. That's a good indication that the company is just interested in getting your money. Two-thirds of consumers who end up in such programs never make it through, and they end up no better off than when they started.
"A debt-management plan may not be the answer," said Travis Plunkett, legislative director for the Consumer Federation of America. "All that might be needed is a budget. Unfortunately, many people wait too long with debt problems and then they panic."
If a debt-management plan is the best way to go, ask about fees. It's OK if the agency asks for a fee to cover the cost of running the program. Credit-counseling services' cut from the money they recover has been halved in the past decade. The problem comes when the agency asks for too much in service fees.
Watch out for places that charge more than $50 for a set-up fee and more than $25 in monthly maintenance fees, consumer advocates say. Ask what the fees will be used for. Some services will take your first month's payment as a set-up fee, which immediately puts you a month behind on your payment plan. Agencies that are serious about helping debt-ridden consumers will waive the fees if the debtor can't pay them.
Make sure the payment cycle coincides with when your bills are due. Some agencies will take your money but not pay your bill on time, leaving you with growing late fees.
Check your statements and make sure that everything you are giving the credit-counseling service is going to pay off your debt. If not, it's likely that someone is skimming and keeping your money.
Cleaning up the industry. Federal and state regulators are stepping up their efforts so that you won't have to worry about hiring a bad counseling agency.
The FTC and the Internal Revenue Service are working on stricter guidelines to determine which services get 501(c)(3) nonprofit status. Some agencies promote their nonprofit standing when they are profiting from their services and paying their officers lavish salaries.
Lorene Yue is a Your Money staff writer.