Editorial Policy

Can I Skip Credit Counseling and Do it Myself?

Erica Sandberg

May 7, 2013

QDear Erica,

After finally getting a decent-paying job, I am ready to take the bull by the horns, so to speak, and pay my overdue credit card bills that I got into while I was not working. Unemployment insurance was only enough to pay my bills and not much else. Anyway, the interest rates on all my cards are very high now. I haven't let them go into collections because I have been paying them partially. I do not want to go use credit counseling because I feel I can deal with this myself, and I need my cards. Also, I want to repair and not kill my credit. I like that the credit counseling system makes you clear it all up in less than five years. Can I duplicate that? — Peter

AHi Peter,

Yes, you can come very close to replicating a credit counseling agency's debt management program! I like these nonprofit organizations, but there is no wizardry involved in their arrangements: If you qualify, you may pay your unsecured debts (including credit card debts) through the agency, and they send the money to the lenders.Ask Erica

Here is what they can do — and how you might be able do it on your own.

Make a budget
The first thing a credit counselor would do is review your entire financial picture, including income, assets and liabilities. Then, your counselor would help you develop a budget and identify areas where you can realistically cut down. Once you've reached the point where there is enough money for essential expenses (plus a bit for savings) and debt payments, you're good to go.

Can you do the same? Of course! Use one of these worksheets to see where you're spending your money today and how you can do so more efficiently with proposed expenditures. It's a great exercise, as it gives you the opportunity to find and then eliminate waste. You can also see how much you have available for your creditors on a fixed monthly basis.

Determine a debt-deletion goal
Assuming you play your part, a credit counseling agency's plan promises to get you in the black within five years. To know how much money you'll need to send every month, they would plug your data into a special mathematical program. When one creditor is paid off, your payment remains the same, and then the others receive more.

You can use a similar calculation here, with this online calculator. Just enter your total debt, the average interest rate of all your cards and the maximum number of months in which you'd like to see zero balances. For example, if you owe $10,000 and your average interest rate is 21 percent, you'd need to pay $271 each month to be in the clear in 60 months (five years), like with the agency's plan. As each debt is paid off, keep the payment the same and send the remaining creditors the excess.

Reduce your interest rates
One of the benefits of going through a credit counseling agency is that they have agreements with major credit issuers, many of which cut interest rates to those in debt management plans. When that happens, more of your payment goes toward the principal than to finance charges.

The reason your interest rates are high is almost certainly because you've been delinquent. So get on track with steady and higher-than-required payments to show your creditors that you've changed for the better. You can contact the credit card issuers now and request rate reductions, but you'll probably find greater success by waiting about six months. Issuers want to hang on to good customers, so prove you are one and they're likely to do what it takes to keep you.

Depending on the reason for your increased interest rates, a provision of the Credit CARD Act of 2009 may work to your advantage. If your issuer raised your interest rate on an existing balance because you missed two payments, it's required to review that rate change every six months. If you make the next six payments on time (starting the month after the higher rate kicks in), the issuer must restore your old rate. So, if it happens that any of your interest rates were hiked on an existing balance because of late payments within the past month, now is the time to pay on time every month to get your old APR back. Some card issuers may offer more lenient policies, so call your issuer to find out. After you've made the required number of on-time payments, contact your issuer to make sure your APR has been lowered.

Become a better money and credit manager
One of my favorite aspects of credit counseling is that it offers people excellent financial guidance and education. It's part of their mission.

Make it your mission, too. Monitor your budget so you never overspend, and save diligently every month or paycheck. While you're in debt-repayment mode, don't add to your balances. It's true that credit counseling agencies require their clients to close accounts on the plan. You don't have to, but at least tuck the cards away. A credit rating increases with current and positive borrowing activity, but it's more important that you save money by eradicating expensive balances. Afterward, you can pick up the plastic again and create the history you really want.

Got a question for Erica? Send her an email.