Credit Basics
Help! You need somebody
The Chatzky Program, Step 7:
When the debt burden gets too heavy, who ya gonna call?
Jean Chatzky,
MONEY Magazine, October 2004
NEW YORK (MONEY Magazine) - When
Hollywood, Fla. couple Ted and Kristie Long married four years ago, they merged
not only their lives but also their debts.
"We each had a couple of credit cards with big balances
and lots with little ones," Ted explains. They were taking home $52,000 but couldn't
seem to get ahead of their $11,000 in credit-card debt, which carried interest rates
of 18 to 20 percent.
"When we sat down each month to pay
our bills, we'd write 10 to 12 checks, which took forever," Ted recalls. "And whenever
we'd get close to paying off the little cards, the big ones would be maxed out, so if we needed something, we'd use the little ones. It was never ending."
Clearly, the Longs needed help. They couldn't consolidate
with a home-equity loan because they didn't own their home. They weren't earning
enough to qualify for an unsecured personal loan. Finally, some friends suggested
a credit counselor.
Getting help: A credit counselor
According to Catherine Williams, vice president
of financial literacy for Money Management International, a Houston-based counseling
agency, it makes sense to seek credit counseling if you're using one card to pay
off another, as the Longs were; if you're taking routine cash advances; or if you've
been denied an increase in your credit line.
The Longs selected Consolidated Credit Counseling
Services, a Fort Lauderdale-based not-for-profit.
As with most agencies of its type, counselors sit
down with consumers who can't pay their bills, ask an hour's worth of budgeting
questions and enroll those for whom it's appropriate in a debt-management program,
or DMP. About a third of potential clients can manage on their own without a DMP,
and another third are in such dire straits that bankruptcy is the only answer, Williams
says.
In a DMP, the credit counselor arranges for you
to pay off your debts at lower interest rates. Old late fees and penalties are also
waived.
In exchange, you agree to stop using
your cards and not apply for more credit. Each month, you make one payment to the
counseling firm, which disburses your payments to your creditors. (The creditors, in turn, rebate a portion of the money to the counseling firm.)
While the Longs have been pleased with their credit
counseling, DMPs aren't the answer to every debtor's prayers. For starters, they're
not free: You'll pay both an up-front activation charge and a monthly fee.
Worse, the Federal Trade Commission has charged
some agencies with not fully disclosing their fees, others with not disbursing money
to creditors in a timely manner, and still others with enriching their boards.
Check them out before you sign up
So if you're in the market for credit counseling,
you need to be careful. Look for a not-for-profit firm that:
-Belongs to the National Foundation of Credit Counselors (NFCC) or Independent Association of Credit Counselors; both require that counselors be certified.
-Will assign a counselor to spend at least 45 minutes to an hour evaluating your financial situation.
-Can handle all your debts.
-Charges no more than $75 up front and $35 a month.
Once you find a counselor, stick with the program, as Ted and Kristie Long have.
Every month for three years they've paid $350 toward their debts, plus $34 to their
counselor.
With only eight months left to go, they're feeling good. In fact, they just took
a trip using absolutely no plastic. "We paid for it three to
six months in advance," Ted says. Their counselor must be proud.
