Credit counseling? Proceed with caution
Nov. 3, 2004

Part of my role in the Queen Creek Chamber of Commerce is to help entrepreneurs start a business. Invariably, once they begin polishing the business plan, the issues of funding and credit come up. Imperfect credit is not uncommon, and the question of what to do about it is.

"Overwhelmed with Debt? We Can Help!" This familiar advertising cry can be tempting to people who feel like they are in a spot. It typically comes from a credit counseling service offering help from creditors and a plan to become debt free. True, such services typically help people work within their income to repay some debt but they often actually hurt your credit standing. In fact, they generally aren't concerned in the least about your credit report or even all of your debt.

Due to the name, many clients automatically think their credit is being cleared. While it's true that paying bills in a timely fashion will improve your credit, there is a lot more to this process. Credit Counseling Services works primarily to get creditors to lower monthly payments, eliminate interest or sometimes accept lump sum payoffs for less than the amount owed. Credit reports for the most part are never even ordered, much less worked on.

A prospect fills out forms that state debt and income. Company staff reviews them and sets an appointment. At this meeting the client brings in bills, and creates a monthly budget. Meanwhile, the counselor will draw up a plan to negotiate with creditors a payment that fits this budget. Once all the monthly payments are compiled into one amount, the client pays the set monthly amount to the company, who distributes it accordingly to each debtor. On top of this monthly payment, there is a nominal fee.

Unfortunately, the majority of the time this type of settlement will appear on your credit report as "settled for less than agreed," or "account settled with CCS." These can appear on your credit report up to seven years after your last payment on the plan. This is negative, damaging information, even though you went on your own accord to seek counseling. Remember, just because a debt is paid, it does not disappear from a credit report.

CCS usually will not handle any secured debt, rent, insurance, utilities, student loans, or a government debt, such as taxes. The majority of the debt it handles is credit-card debt and collection agency accounts. For any other debt, it will advise that you are on your own and to work it out with the creditor directly, although debt-counseling services offer some direction.

There is good in what they do, namely dealing with creditors to get rid of phone calls, at least unsecured creditors. Also, they can encourage you and coach you if you need motivation. Often they provide an alternative to bankruptcy.

But be mindful, well-intentioned credit-counseling services can actually harm your credit. So be careful when looking at this option.





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