Debt reduction: The right call for help
can lift your credit card bill blues

With the holiday credit card bills rolling in, many people are feeling the pinch -- or panic, depending on how close to the bottom their bottom line has sunk.

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Those in the financial fixer-upper business say they are hearing from more people with higher debts this year because buyers' confidence in a strong economy inspired a bigger spending surge.

"The problem is, we're in the longest economic expansion in U.S. history -- low inflation and unemployment, soaring equity markets -- but incomes have remained fairly flat," says Steve Rhode, president and co-founder of Debt Counselors of America.

"We're not making more and the rate of our savings is down. We're just treading water, but everything else is going great."

Back in the high (debt) life
Statistics show holiday shoppers outdid themselves. The U.S. Department of Commerce's Census Bureau reports that December 1999 retail sales reached $260 billion, up 9.7 percent from the previous year. Credit card purchases, estimated at $100 billion -- $7 billion of which was online shopping -- account for 38 percent of that.

After all that spending, there will be a lot of financial mending. Credit counselors say their peak season is mid-January through mid-April, when many people rely on their tax refund to bail them out.

How do consumers decide whether they need help, and where do they go for it?

Credit counselors say there are several symptoms that indicate that someone needs a debt doctor. They include:

• Not being able to make more than the minimum payment on credit cards.
• Having to use credit for items you used to pay cash for, such as food and gas.
• Making credit card payments by charging them to other cards.
• Being in a position where any emergency, such as car repairs, could put you under.
• Never seeing an improvement in your finances year after year.
• Worrying about money.

Not how much, but how bad
Experts agree that the determinant is not how much a person owes, but how the debt affects them.

"Somebody could be $1,000 in debt and that could be a major debt to them," says Paul Donohue, president of Credit Card Management Services Inc., a nationwide nonprofit company based in West Palm Beach, Fla.

"You should seek help when you start feeling distressed."

Whether a person needs to budget his way out of a $500 or $50,000 debt, there are plenty of places to turn to.

Assuming a person can't afford to pay hourly fees to a certified financial planner, the most highly recommended services are nonprofit debt counseling agencies. Voluntary contributions from clients, small fees and funding from creditors enable these organizations to provide assistance to thousands of people each year at little or no cost to the clients.

Lenders support the agencies because they are helping them get their money back. Some creditors will reduce or waive finance charges and stop charging late fees to customers who sign up for a debt management program with a nonprofit credit counselor.

Debt Counselors of America and the National Foundation for Consumer Credit are the most well known of these groups. Debt Counselors assists people over the Internet and by phone, while the NFCC has a national network of 1,450 offices called Consumer Credit Counseling Services. They provide counseling in person, as well as electronically.

Options abound
Whether a person just wants the answer to a question, needs help drawing up a household budget or has a mountain of debt to overcome, the organizations have a variety of programs and resources -- from online chat rooms, self-help publications and community seminars to long-term debt management programs.

Debt management plans are generally for people whose bills can be wiped out in four years or less. The NFCC's average client is 36 years old, is making $32,000 a year and has $23,000 in unsecured debt.

"If it looks like someone is in a hole that would take years and years to get out of, then we would put them on a debt management plan," says Norma Tharp, spokeswoman for the group's north Georgia offices.

There are people whose situations are so bad they are turned away, says Tharp. "We had a young man who just got out of college, had no job and had $85,000 in credit card debt," she said. "We advised him to seek legal services."

That's where companies such as Gates, Paul and Lear often come in. The San Jose, Calif., firm negotiates settlements with creditors for people who are on the brink of bankruptcy or have been sued. The average client is $30,000 to $40,000 over their head.

"We get a lot of clients who have been turned down by (counseling services) because they can't meet the minimum payment requirements," says company president Richard Nikoley. "Our clients are in serious trouble."

The for-profit company works on contingency fees. The client pays only if a settlement can be reached. Nikoley says it costs the customer 10 cents to 60 cents for every $1 of debt, depending on the customer's ability to repay. That means someone who owes $10,000 would pay up to $6,000. Gates, Paul and Lear's fee and the creditor's settlement come out of that sum.

"A person might cash in a retirement plan, take out a home loan or slowly save enough to make the payment," says Nikoley.

The advantages to the client: Getting out of debt much quicker -- usually within a year, two at the most -- and avoiding bankruptcy.

The disadvantages: The person may have to tap a valuable asset such as retirement savings, and a quick fix might not change bad habits like a long-term payoff plan would.

"By the time they have paid off their bills through debt management, our people have become fabulous penny-pinchers," says the NFCC's Tharp.

Saving the rating
Regardless of the method a person chooses to beat the bills, there is no guarantee that the credit rating can be saved. In fact, advisers agree, a person in debt should not focus on that.

"Their good credit is what gets a lot of people in trouble in the first place," says Nikoley. "A lot of times you have to sacrifice that to get the job done."

Says Rhode, "People will make poor decisions on how to handle their debt because they are afraid of their credit report."

Fear sometimes propels people to fall for fix-it scams such as credit repair, title or payday loans, and advance-fee loans.

The only sure and solid way to repair a credit history is over time, by paying bills when they are due and making sure your credit report contains correct information.

Donohue urges people to seek help sooner rather than later, and says there is no need to feel embarrassed or ashamed.

"You're not a terrible person because you have credit card debt. Everybody has it."