Good Credit Counselor Can Be Godsend

If you are falling behind on your credit card bills or simply want to budget your spending better, consider using a nonprofit consumer credit counseling center. These centers provide advice and services that can help you out of your predicament, at little or no cost.

But be wary of so-called credit repair clinics, which may charge exorbitant fees for services or advice that you can probably get on your own for next to nothing.

Thanks to the growth of plastic in recent years, demand for these counseling services is booming. The National Foundation for Consumer Credit, a nonprofit umbrella organization for 380 centers nationwide, estimates that about 210,000 families will use the services this year, up from 177,000 last year. The foundation, which has added 50 new offices in the last 12 months, expects to help debtors pay $200 million in debt this year, says foundation spokesman Kenneth Scott.

“We’ve never heard a single complaint from anyone that they’ve received anything less than the most helpful and aggressive assistance” from the centers, says Elgie Holstein, executive director of Bankcard Holders of America, a consumer group based in Herndon, Va.

Under what conditions should you visit a consumer credit counseling center?

The centers are aimed at servicing people who are badly overextended on their bank credit card bills, retailers’ bills, personal loans, finance company loans or other unsecured debt, says Pamela Tobias, office manager of the Consumer Credit Counselors of Los Angeles.

But don’t wait until collection agencies are coming after you to see a counselor, she says. Instead, come in if you meet any one of the following danger signals of people overextended on credit:

- You are borrowing to meet regular expenses such as food and utilities.

- You can barely make the minimum payment on your credit cards but continue to use them for more purchases.

- You use 25% or more of your take-home pay for credit card bills and personal loans.

- You have borrowed to your credit limits.

- You have no cash in reserve.

- You are using one form of loan or debt consolidation to make payments on other debts.

- Your checks are bouncing.

- You are so behind on credit payments that collection agencies are calling you.

“If nothing else, we can have someone go over a budget for you so you can get your spending under control,” Tobias says. “We’re more interested in preventing problems.”

Unfortunately, however, most people don’t deal with their credit woes until it is too late. The average client visiting a center owes unsecured debt of $12,000--excluding car and house payments and necessities such as utility and food bills--to 12 creditors, and earns $1,500 a month, Scott says. Typically, these people practice poor money management; have lost one income in a two-income family due to a child, injury or forced retirement; have lost their jobs or suffered a drop in salary.

What can a counseling center do for you?

First, a counselor will review your financial situation, advising you on how you can cut expenses and make out a budget, Tobias says. That might involve writing more letters to friends (to cut your phone bill) or trying to get a part-time second job to boost your income, she says. The centers also can instruct you on how to get and read your credit report on file at a credit bureau.

Such counseling is free and is aimed at helping you to take care of your bills on your own.

But if you still cannot fully service your unsecured debts after all that budgeting and cost cutting, the center will work out a debt-repayment plan to satisfy creditors. After running up big debts, people often are reluctant to contact creditors themselves.

The center will take the funds you have available after necessities such as mortgage and car payments, and food and utility bills, and divide them up so that creditors are paid in equal percentages.

“We tell them this is what is left, and they accept it,” Tobias says. “The individual debtor has a difficult time getting that relationship with creditors.”

The monthly cost to you for this debt-repayment service can range from nothing at some offices to 6.5% of the monthly payments or $20--whichever is lowest--at the Los Angeles center. But no one is turned away because of an inability to pay, Scott says. “We do not deny anyone service,” he notes.

Creditors--whose contributions help finance the centers--generally are happy with the service, because otherwise they may not get as much from debtors. Or they may have to use costly collection agencies, which keep as much as 25% of what they collect.

“The creditors like it. We are an excellent alternative to bankruptcy,” Tobias adds, noting that “by cooperating with us, the creditors also have a better-educated potential customer again.”

To find a center in your area, look in the Yellow Pages under credit and debt counseling services, or consumer credit counseling. Separate centers serve Los Angeles, Orange, San Diego and Ventura counties, with another one serving both Riverside and San Bernardino counties.

Or write to the National Foundation for Consumer Credit, 8701 Georgia Ave., Silver Spring, Md. 20910, or call it at (301) 589-5600.

These centers should not be confused with for-profit credit repair clinics. These clinics, which frequently tout their services in newspaper classified advertising sections, may charge fees of anywhere between $50 and $2,000 for services or advice that you can get for free or at very low cost, according to Holstein of the Bankcard Holders of America.

They take advantage of desperate and often uninformed consumers with poor credit records who are unable to get credit cards or other loans at reputable lending institutions, Holstein charges. Such clinics often “guarantee” a Visa or MasterCard for those with poor credit, without disclosing that they will charge you a huge additional fee just to apply for a secured (collateralized) credit card that normally carries no application fee.

They also hold out the promise of “cleaning up” your credit report by removing negative information. But under the Fair Credit Reporting Act, you have the right to find out what is in your credit report and challenge any information you believe to be inaccurate.

Fortunately, California and several other states have laws to protect you against these deceptive practices. They generally require credit clinics to inform you of your rights under the Fair Credit Reporting Act and to represent accurately what they can and cannot do, Holstein says.