Editorial Policy

When's the best time to seek credit counseling?

Erica Sandberg

December 2, 2014

QHi Erica,

I think I want to go to a credit counselor, but am not sure. I owe at least $50,000 to credit cards. This was gradual — it took a lifetime, you could say. I've had the cards for about 15 years. I have made every payment when I should, but they kept giving me more credit! The debt added up, so here I am today, broken down by the bills. At this rate, I will never get out. I know credit counselors will force me to close everything and make me pay, but it's almost Christmas, so maybe now is not the time? What do you think? Wait or go now? —Meg

ADear Meg,

Today is the day. I see no reason to delay getting objective financial advice from a professional. You will not be commanded to do anything you don't want to do. As a former credit counselor, I promise you that the person assigned to you will simply review your assets, income, expenses and debts, then offer a few suggestions on what you can do to solve the problem. Check out the Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling for a referral.Ask Erica

Now, it is true that these nonprofit agencies provide repayment plans, but they are only appropriate for certain clients. A good counselor will not present it as a solution unless you meet specific criteria. Essentially, that means that you would have just the right amount of money to pay your debts on their program after subtracting your monthly earnings from your essential bills. You could not have so much remaining where you'd easily be able to deal with what you owe on your own, or so little that satisfying the creditors would leave you unable to meet the basics, such as housing expenses, groceries, gas, children's needs and a little for savings.

Even if the counselor were to offer the plan, participating is voluntary. But, if it is presented as an option, consider it. Repayment programs are arranged so that you're out of debt within three to five years — meaning an end to your troubles would be in sight. Here are some of the benefits:

Charging stops now. You must close the accounts, but it's because you'll be focusing on achieving solvency. In fact, I would recommend that you do this anyway, because you've got to stop charging what you can't afford. Get rid of the temptation!

Pay less in interest. Many of the creditors that work with these agencies have pre-negotiated interest rate reductions. On a debt the size of yours, the savings could be huge. For example, if the average APR on your cards is 20 percent, over five years you'd pay nearly $30,000 in finance fees — and that's if you never charged another penny! If the agency could slash the rate to half, the fees would total about $13,000. Still a lot, but much better.

Simplicity. It can be a great relief to hand over your accounts to a third party to manage. All you would have to do is pay the agency, and it distributes the funds. You just need to make sure you have enough in your checking account on the withdrawal date. Additionally, your payment would remain constant, so when one balance is at zero, the others receive more money. If you have extra cash, you're encouraged to increase the payment, too.

Mind that I am not a diehard advocate of these plans. There is an administration fee, which could be up to $50 per month and you won't have the flexibility of paying with plastic. As for your credit report, it may show that you are using a third-party service, but that notation will not be factored in to your credit scores.

If you're really committed to getting out of debt, though, you can create your own plan by building a budget, deciding on a fixed sum to pay your creditors every month, and then canceling (or just not using) your accounts. The same interest rate concessions may not be available to you as an individual, but if you contact the issuers and explain your intention, they may give you a break, especially if you whittle the debt down a bit first.

As for Christmas or any other holiday, until you're in a more stable financial place, I recommend handmade cards and warm seasonal greetings.

Got a question for Erica? Send her an email.