FAQ about debt and credit counseling

If you’re in debt, you’re not alone. According to the Federal Reserve, Americans are in $1.98 trillion of debt — that’s more than $18,000 per household. If your debt is overwhelming, you can seek help from a debt or credit counselor. But who do you ask and how do you know if he or she has your best interests in mind?

We’ve gathered the most frequently asked questions about debt and credit counseling. They should help you on your way to a more stable financial future.

When do I know I need debt counseling?
There is no specific amount of debt — whether it’s $5,000 or $50,000 — that denotes you need a debt counselor. You need to consider how much income you have each month, what your expenses are and what your financial plans are. If you can plan a way to get out of debt yourself, that may be your best bet. If you feel helpless, overwhelmed or can’t figure out a plan, you may need debt counseling.

How do I find a good debt counselor or credit counselor?
When shopping for help, either for a credit counseling agency or a debt consolidation agency, keep in mind that just because a company claims to be nonprofit, doesn’t mean it has your best interest at heart. Be wary of a company that immediately urges you to join a debt management plan — they should take an interest in your particular issues, not throw you toward a cookie-cutter plan. And like any other big decision, shop around and ask for all prices and fees to be stated up front and put in writing.

Bankrate has more in-depth tips on finding someone to assist you with your debt.

What should I be careful of when consulting a debt negotiator?
If you’re not careful you may find a company that will promise to ease your debt — but actually put you deeper in the hole. Some debt negotiators charge hefty fees. But that’s only part of the problem. Your credit takes just as much of a hit as your wallet.

Here’s why. Often, a debt-negotiating company will tell you to stop making payments to creditors and to send money to them instead. The money gets placed in an account until the debt negotiator decides to make an offer to a credit card company. It could be several months before a debt negotiator has collected enough money from you to make a settlement offer to a creditor.

And after several months of not paying your creditors, your credit will be trashed. Not all debt negotiators are on the up and up. Some consumers pay high fees and never get any of their debts settled through a debt negotiator or debt-settlement company. Contact the Better Business Bureau to see if the firm has had any consumer complaints. Check with your state attorney general’s office or other state consumer agencies to find out if there are any pending legal investigations.

Are these e-mails that promise to eliminate my debt for real?
No. Your debt is your debt — end of story. There is not a magic wand to wave away your debt problems. Some of these companies say that they have found a way around the law — but if this were true, all credit card companies would be out of business. Other companies will promise to negotiate with debt collection agencies to get your debt reduced. But you can do that yourself — no middleman required.

How long will it take me to pay off my debt?
It depends on the interest rate you are paying and how much you can pay out each month. The more you pay, the quicker the balance disappears. For example, if you paid only the minimum amount due on $8,000, which is the average amount of individual household credit card debt, at an average annual percentage rate of 13.9 percent, it would take 278 months to be rid of your debt. In that time, you will pay $6,792.25 in interest. If you added an extra $100 to the payment each month the savings are dramatic. It would be paid off in 33 months, and would cost you $1,639.13 in interest.

Use this Bankrate calculator to figure out how long you will be paying off your debt.

Will debt-counseling affect my credit?
Using a debt-management plan to pay off debt won’t hurt your credit score, but it may make it difficult to qualify for new credit.

When you enroll in a debt-management program, you write a monthly check to a credit-counseling agency and the agency pays your creditors. A debt-management plan usually lasts three or four years. A comment stating that you’re paying an account through a credit-counseling agency appears on your credit report and remains until the account is paid in full. Such a comment won’t hurt your credit score in the least.

However, if you get involved with a debt management agency that is late making payments to your creditors — or doesn’t make any payments at all — your credit will be damaged.