Using a credit-counseling service

Dear Dr. Don,
The past few months we have gotten behind in our credit card payments. We heard about the credit-counselor companies who can get the rates lowered so we can pay them off once and for all. We already know how late payments affect our credit. How does this service affect our credit? Are there any ramifications in using this service?
Clark Credit

Dear Clark,
When you use a credit-counseling service to structure a debt-management plan, the accounts included in that plan are usually noted on your credit report as "not being paid as agreed." These creditors may also report that the payments are being received through a credit-counseling service.

Credit-counseling services make the point that being in a debt-management plan shows that you're dedicated to repaying your debts, and that can be considered positive when creditors review your report. While that's true, it will be an uphill battle to qualify for new credit until you get a couple of years of solid repayment history on your credit report.

In general, credit-counseling agencies expect you to not take on new revolving credit while in a debt-management plan. Most plans are scheduled to last from three to five years. While you are in the plan your existing revolving credit accounts will be suspended or closed to new charges.

Credit-counseling services help consumers by negotiating with your creditors to agree on a repayment plan, and they may be able to reduce the interest rate on your outstanding balances for accounts in the plan.

Under the Fair Credit Reporting Act, a negative item other than a bankruptcy filing stays on your credit report for seven years from the date it was first reported. That includes the "account not paid as agreed" listing. Bankruptcies stay on your credit report from seven to 10 years depending on the type of bankruptcy and the resolution of the bankruptcy filing.

The Federal Trade Commission publishes a guide, Fiscal Fitness: Choosing a Credit Counselor, that is required reading before shopping for a credit counselor. After reading the guide, check out the National Foundation for Credit Counseling's Web site. Keep in mind that nonprofit doesn't mean free. Understand what the agency can do for you and what you'll pay for that service before signing any agreement.

You'll have a lot of the same credit problems that someone that filed for bankruptcy goes through. The differences between a debt-management plan and a Chapter 13 bankruptcy repayment plan aren't as big as you might think, so keep that option in your back pocket as you discuss your debt problems with a credit counselor.