Credit Counseling 101: Can It Really Get You Out of Debt?

We're hearing from a lot of you who are up to your eyeballs in debt. Consumer debt is a VERY serious problem right now, approaching $2 trillion. Unfortunately, the problem is getting even worse for a lot of people in this recession.

You often see those attractive TV and Internet ads offering debt relief, but you wonder if they are legitimate. Most of those ads promote credit counseling agencies that promise lower interest rates and an easy way out of debt, but you need to know if they really work or are just out to take even more of your hard-earned money.

When you contact a credit counseling agency, they'll ask you about your debts, your income and your expenses. They need this information to decide whether you can afford to pay back your debt over the next three to five years.

If they decide you can, the counselor will likely suggest a Debt Management Program (DMP). You make one monthly payment to the counseling agency and they will pay each of your participating creditors each month.

Sounds simple, right? But here's the scoop: Credit counseling is big business.

Credit counseling was initially created by…drum roll, please…the credit industry! Why? To keep consumers from declaring bankruptcy. Many counseling agencies even have members of the credit community on their boards of directors. This is not necessarily a bad thing, but you must realize that their focus is to get you to pay back your debt, not to steer you to bankruptcy or debt settlement.

And remember that like any big business, there are literally hundreds of agencies out there. Some are better than others, so let us help you decide whether credit counseling is worth it for you.

Credit Counseling Basics

Generally speaking, most people do achieve better results working with a counseling agency than going it alone. If you have only a few debts, there is no harm in trying to work out a repayment plan on your own directly with your creditors. But don't be surprised if some creditors insist that you work with a counseling agency.

This is especially true if you have multiple debts. Creditors know that they are much more likely to receive their payments on time – and be treated fairly along with other creditors – if you have received budget counseling and are enrolled in a DMP. It's also a lot easier for them to collect regular payments from a counseling agency than from individuals who are having trouble juggling their bills.

So is credit counseling right for you?

Next: Six basics to keep in mind when talking to a counseling service