The Debt Adviser By Steve Bucci • Bankrate.com

How counseling affects your credit rating

Dear Debt Adviser:
We recently made a call to a credit counseling company. They said that we could make payments to them on a monthly basis and they would pay down our credit cards over the next three years. We are wondering if this is considered a "charge off" and how this will affect our credit rating.
Michele

Dear Michele:
Congratulations for the making the decision to get your finances under control! You have taken the very important first step of getting professional help with a tricky problem.

Generally, accounts that are paid off through a credit counseling agency are not considered "charge offs." When working with a credit counseling agency, your creditors may agree to lower interest rates, eliminate fees or other concessions to make it possible for you to pay off the account. Creditors are willing to work with consumers in this way because they recognize that reputable credit counseling organizations improve the odds that the creditor will get the bulk of the money owed on the account repaid, instead of losing it to bankruptcy or a charge off. Creditors typically write off -- "charge off" -- a debt if there has been no payment on the account for more than 180 days or six months.

When you go to credit counseling, your credit accounts will be closed and you will receive monthly statements from creditors reflecting each payment distributed by your credit counseling agency. It is up to the individual creditor how the activity of your account is reported to the credit bureaus. Some will report the account closed and add a credit counseling notation. Many will report only that the creditor closed the account.

The second part of your question depends quite heavily on what your credit report looks like now, before you enter a debt-repayment plan. Paying off what you owe will be a positive. However, any negatives that have already occurred such as late payments, charge-offs or missed payments will remain on your record.

I would encourage you to use your credit counselor's expertise and, if you have not already received one, request a comprehensive evaluation of your financial situation to make sure that your debt-repayment plan will be successful. It is important that the agency provide you with documents outlining in detail your responsibilities (fees, voluntary contributions) and the agencies' services regarding your debt-repayment plan.

In addition, you should be provided a document describing how to resolve any disputes that may arise over the next three years under your debt-repayment plan agreement. Also, be sure that they give you the option to terminate your agreement for any reason and that you have no obligation to continue the plan unless satisfied with the services provided.

Be sure that you understand everything and that all your questions have been answered about your debt-repayment plan agreement before signing up. If you experience any of the following with a credit counseling agency, you will want to look for another.

What to beware of in a credit counseling agency:

• Large upfront fees to begin a debt repayment program (a set-up fee should be no higher than $75 and a counseling fee normally runs under $50).
  
  
• Pressure in any form to join a program or to pay fees that you cannot afford.
  
  
• An offer to place you on a debt repayment plan without offering to develop a detailed spending plan to see if you can afford the payments.
  
  
• Offering a solution, supposedly in your best interest, after spending only 20 minutes with you.

Michele, you are on the right track by seeking help to get your finances in order. Good luck!