As debt squeezes more Americans, many are turning to credit-counseling agencies for help to dig out from an overwhelming pile of bills. That can be a good idea or a bad one. But it's a more complicated decision than it might seem.
Often, you will pay for the service, and your creditworthiness could be damaged in the process. Though these agencies might technically be nonprofit organizations, it doesn't mean they are charities offering free or even legitimate assistance.
You could pay high fees and receive bad advice. These warnings don't mean you shouldn't seek credit counseling, and if you're filing for bankruptcy, you're required to obtain it.
But you should know that hiring a credit counselor is an important spending decision.
"The consumer has to do his homework," said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. "He has to not only ask the right questions of the agencies he's considering doing business with, but he has to receive the right answers."
Here is advice on choosing a good counselor:
Determine whether you're a good candidate. Sometimes a credit-counseling agency doesn't do anything you couldn't do for yourself.
Evaluate all of your options before entering credit counseling, including developing a better spending and savings plan and negotiating with creditors yourself.
Enlisting a credit counselor will be noted on your credit report. It can do significant damage to your ability to borrow money at good interest rates, because creditors will see that notation.
But credit counseling doesn't directly affect your three-digit credit score. Many distressed people seeking counseling have badly dinged up their creditworthiness, so an additional bad mark is perhaps only incremental.
If you feel overwhelmed, and you are using credit cards for daily living expenses and you have considered tapping your home equity or retirement plan to pay debts because you don't know what else to do, you might be a good candidate for counseling.
Beware the pitches. An agency that says it can eliminate your debt quickly and erase your bad credit history is not reputable.
Follow the money. Know how a counselor is paid. Be dogged when asking about how the fee structure works. Read everything thoroughly before signing.
Learn about debt-management plans. A debt-management plan allows the counseling agency to work with creditors on your behalf. It often can obtain lower interest rates on some of your debts, negotiate more flexible repayment schedules and potentially have extra fees waived.
But know that the plans are how counseling agencies make most of their money. They are paid by creditors, such as banks issuing credit cards. That establishes a dicey relationship about whom the counselor works for, you or the creditor.
Observe the 20-minute rule. Your first counseling session should last at least an hour with a trained and certified counselor. If a counselor is pushing a debt-management plan within the first 20 minutes of learning your financial picture, you should be wary.
Know all the fees. Reasonable one-time and monthly fees are in the $25 to $75 range. If total fees are measured in hundreds or thousands of dollars, you're in the wrong ballpark. A counselor should be willing to waive all fees for cases of true hardship. If a counselor plans to keep your entire first debt-management-plan payment, keep looking for a counselor.
Check the affiliation. Although an agency is technically a nonprofit, that doesn't provide much of a clue about whether it is reputable. Affiliations with industry groups, such as the National Foundation for Credit Counseling (www.nfcc.org), raise your chances of dealing with a good counselor. Many foundation members go by the name Consumer Credit Counseling Service.
Another certifying group is the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org).
You also should check with the Better Business Bureau and your state attorney general's office and ask about consumer complaints. Be wary of cold calls from credit-counseling agencies.
Make sure the agency pays. A big problem with credit-counseling agencies is they sometimes don't pay your creditors on time, which can trigger late fees and damage your credit rating.
Trust yourself. If you feel a counselor is trying to confuse you, pressure you, make you feel uncomfortable or otherwise doesn't pass the "smell test," walk away.
Gregory Karp writes for The Morning Call in Allentown, Pa.