Credit counseling-the good, the bad, and the ugly?

August 29, 2005 11:15 PM

FinancialStupidityFilter: I'm looking at years of accumulated debt--partly accumulated because I was young and foolish, partly because of genuine emergencies--and have decided that it's time to bite the bullet, accept the penalties, and do something that will involve freezing/cutting up the credit cards. In other words, it's time to investigate credit counseling, with the very real problems that entails.

I've already pared down my expenses and eliminated future luxuries (and, alas, some necessities) from the budget; it's the finance charges & interest that are proving to be my undoing. Filing for Chapter 13 bankruptcy doesn't make sense in my situation. Right now, I pay over minimum on my balances, but the announced increases for next year may get me into real trouble--hence this decision. Of the unpleasant alternatives, counseling & consolidation is probably the best bet: everything gets repaid on a fixed 3-to-5 year plan and the counseling notation is removed from your credit report after the plan is completed. But still, there are risks. Good experiences? Bad experiences? I'm looking for reassurance, yes, but I'd also like to hear about anything you wish you had known beforehand.

posted by anonymous to work & money (8 comments total)

I'm a little confused. It seems like you are able to pay all your bills, but without much money left over. I've you been paying everything on time for the past few years, you'll still have a good rating, even if you feel really poor.

You should find out your actual credit score. I did it through transunion's website. Transunion is one of the big-three credit reporting agencies, and their report is only like $29 to get your score from all three agencies.

Getting your 'free' credit report by mail might take a while, and doesn't include your score.

Plus this one has all sorts of pretty graphs.

---

Anyway, if you still have a pretty good credit rating, you might be able to just get a single loan and use that money to pay back all your credit cards, etc.

If you're already behind in your payments, then yeah you'll need to do something more drastic, I guess.
posted by delmoi at 11:37 PM on August 29, 2005

Hmmm. Having been in a similar boat, for similar reasons, I did some research on credit counseling services and discovered that many of them, although "non-profit," are actually fronting for credit card companies who are anxious not to lose "unsecured" debt due to a bankruptcy filing. Additionally, there are horror stories out there about credit counseling services that don't actually do you a whole lot of good, to put it mildly. You may find, as we did, that negotiating rate reductions in good faith on your own behalf with your creditors will do you more good in the long run. Dave Ramsey, well-known in the Nashville area (and possibly elsewhere on talk radio, he's pretty widely syndicated) has some pretty good advice along those lines. His book is worth a read, his radio show is worth a listen, and his web site is worth a browse. Good luck.

-Zak-
posted by ZakDaddy at 12:01 AM on August 30, 2005

Are you sure you're not my twin? :-)

We learned this lesson ourselves, and ten years later we purchase _nothing_ with a credit card. We have an auto loan and home loans, but no plastic.

We didn't go through credit counseling - we applied the principles ourselves. The thing credit counselors can do for you that you may not be able to do yourself is get your credit card providers to dramatically reduce, or even eliminate, your interest rate and to stop the penalties. If you have several cards, you might consider counseling unless you're sure you can do it yourself.

We did interview with a credit counselor, and learned about their procedure. Some agencies take a monthly payment from you and pay your credit card bills with that payment, so you don't pay the card companies directly. Others give you a schedule to follow, and you pay the cards yourself. The monthly payment includes a fee for their counseling services.

In either case, they prioritize your debts according to interest rate, amount due, and other factors, and start paying off the highest priority debt first. That's not necessarily the highest interest rate or the largest amount; if creditor A wants a $100 minimum payment on a $1,000 debt and creditor B wants a $25 minimum payment on a $5,000 debt, it may be better to pay A or B first depending on your particular cash flow and life situation.

When the first debt is eliminated, they take the amount you were paying that entity and apply the amount to the second-highest priority debt. Your monthly obligation will stay the same, providing you keep to the agreement.

If you think you can do it yourself, there are several books that will help you; I don't like Suze Orman's speaking style but her advice in this area is dead on. She's trying to convince young people that getting 50 credit cards but only using one isn't necessarily a good idea, and her latest book or one of her earlier ones might help you greatly.

The sooner you get out of the crush of massive consumer debt, the better off you'll be. Congratulations for learning this lesson now instead of when you're ready to retire with nothing to show for a lifetime of work.
posted by lambchop1 at 12:12 AM on August 30, 2005

One more thing.... don't take out a home equity loan to refinance your unsecured debt, such as credit cards. If you don't have the discipline to cut up the cards and you get behind again, you run the risk of losing your house.

If the consolidation you mentioned involves your home, run away.
posted by lambchop1 at 12:16 AM on August 30, 2005

I've had some success dealing directly with my creditors. In my case it's just 2 credit cards, so if you're dealing with more than a few it may just be too much of a hassle for you to deal with each individually. One credit card has given me 0% interest and no penalties for the period of time it's going to take to pay down the debt to $0. I pay a fixed amount to them every month, and they automatically take it out of my account, so I don't have to think about it.

The other credit card company has been more of a beast to deal with, but they cut me enough slack when I needed it, and got me down to reasonable monthly payments with less interest.

I explored credit counseling, but the ones I talked to offered me higher monthly payments than I got dealing with my creditors directly.
posted by banjo_and_the_pork at 4:18 AM on August 30, 2005

Figure out the maximum, per month, you can pay on your cards. Pay the minimum on all your cards except the one with the highest interest rate. On that one, pay the rest of your monthly "debt bill" budget. When that card is paid off, continue down the chain, paying minimums on all except the one with the highest interest rate.

DO NOT cancel your accounts (you need to keep cards in order to build your credit score/history, the older the account the better), and do not let any of them go to 30 days late status. There's nothing wrong, however, with physically cutting up your cards if you think having them will tempt you into using them.

You'll be paid off without any third party involvement, there will be no adverse notation on your credit report, and you'll feel good for doing it. You may also be able to contact your CC companies and tell them that you're having some trouble, and you'd like to get your interest rate on your current balance lowered, to help you avoid any problems paying off the card. Many will do it, just ask for it. If the CSR that answers can't help you, ask for their supervisor/manager, and insist that you need their help to stay out of trouble with that card.
posted by Merdryn at 5:55 AM on August 30, 2005

Pay the minimum on all your cards except the one with the highest interest rate. On that one, pay the rest of your monthly "debt bill" budget.

I'd amend this a bit, seeing as you say you're already paying more than the minimum. Definitely pick one card at a time to pay down aggressively, but keep paying more than the minimum on the rest your cards in the meantime. Even if you have to scale down on those cards to just pay an extra $10 more than the minimum, it's still good for your credit rating.
posted by scody at 9:06 AM on August 30, 2005

(pre-apologies for how massive this is, but I think it's a lot of important information)

As you discovered, there's a lot of disparity in CCC services. In fact, not all result in notations on your reports - I know of people in plans who have no indications on their reports they're in a program.

Delmoi, being able to make better than a minimum payment is no barometer of fiscal health, particularly when Anon says the jump from 1.5% of total balance to 3% could be a problem. Even at amazingly low rates you're accumulating at 8-12% while decreasing at 18%. $2,000 with a 1.5% payment of $30 monthly and a rate of 9% will be paid off in just over 7 years and just under $800 in interest charges... about 40% of the original balance.

Personally I call that "indentured servitude."

Cheapskate Monthly has some complicated-ass calculator for figuing out a plan but several people above have identified the important bits. A CCCS can sometimes negotiate better rates for you than you can for yourself, but not always. ZakDaddy rightly points out that the CCCS people serve two masters, or more accurately serve the CC companies while pretending to serve you. This doesn't mean they're not useful but it's important to know what their priorities are, though it doesn't seem likely to apply to you.

Were I in your shoes, the first thing I'd (probably*) do is make my own efforts towards getting better rates. The biggest enemy you have is the universal default clause. Slight problems on your credit report with one lender can turn into problems with everyone - almost every current agreement allows them to bump your rates if you become a worse risk, which includes making late payments to OTHER lenders. You can end up going from treading water to the bottom of the lake in very little time once those rates and fees take off.

Over on Art of Credit you'll find many posts on getting and examining your credit score as well as improving it. A fellow calling himself FlyingIFR has a system he suggests for doing it. You don't want MORE credit but you do want BETTER credit and better scores gets you better rates; when you call up and ask for a better rate they're not going to be interested in doing anything for you if you have nowhere else to go. Why would I agree to give a water discount to a man who is on fire? He'll pay whatever I ask.

This said, if you work on transfering balances and getting better rates you MUST MUST MUST apply the first rule of getting out of a hole: STOP DIGGING.

* I say probably because if you've got so many lates and a horrid debt/income ratio that score improvement is unlikely then CCC services will definately be able to get you a better deal. Also, if your debt is currently under control but amounts up to near as much or more than you gross in a year then failure may be inevitable and Ch7/13 might be the way to go. You need to be looking not at your short-term ability to stay afloat but rather your ability to get up and stay up on dry land.

I personally believe people should pay what they owe, however if you're in a situation where $1 in charges has been long since paid and now you're trying to cover the $3 in fees and interest that have been piled on over the years there shouldn't be any shame in using the escape valves we have in our society, meaning bankruptcy. I've both seen and read situations where people who initially owed $2,000 found themselves with bills in the 6000-7000 range after CC companies piled monthly late fees, overlimit charges and 29% interest onto people who were drowning. They engage in these policies because over the big picture they are winners for them, but that means the small percentage who end up that deep but don't take the Bk7 route those rates are compensating for should be repeatetedly raped for trying to make good.

If you're chomping at the bit looking to call me a supporter of deadbeats, I'd point out to you that the historical average return in the stock market is 11%. The current top credit card rates are 29% (although there is no federal cap and we may see that continue to rise) and that does not include the also unregulated fees that can easily add $50+ every month to the bill of someone in crisis. Most state laws allow rates to perpetuate according to the CC agreement, meaning VISA can keep that person on the line for that rate near forever, barring some other lesser-known legal remedies. The most financially advantageous strategy for companies is to trick consumers into repeatedly extending the statute of limitations on legal action so as to accumulate a debt at that high rate and then finally sue, at which point that massive debt will be subject to the state regulated amount for judgements which is notably less.

This is why rates and fees skyrocket when the debtor most desperately needs them not to, as they circle the drain: at zero additional cost to the lender, they increase what will either be a loss writeoff or an eventual judgement, and judgements are effectively forever. You can find articles written before the recent BK legislation with stories of people who have paid a debt 3-4 times over in the preceeding 4-8 years and still have more than the original debt left to pay off.

The new bankrupty legislation limits the ability of people in crisis to use those remedies but has no matching obligations placed on the creditors to find a middle ground with people who want to get out from under lifetime debt.

Good luck to you. It can be a horribly depressing endeavor to embark on but the eventual goal is well worth it.
posted by phearlez at 10:45 AM on August 30, 2005