Jennifer Phyfe and her husband went to a credit counseling service eight years ago and they will
never forget the office decor. "He had a big jar and it was filled with credit cards," says Jennifer.
"You had to cut them up right there-it was painful."
The Phyfes were not-and are not-alone. In 1999, the average American household carried a
balance of $7,564, up from $2,985 in 1990, according to CardWeb.com, a credit card research company.
To save yourself from the statistics, read about our free credit counseling service.
"I always say paying off debt is not like going to a salad bar and picking and choosing," continues
McNally, who has dealt with clients who owe up to $160,000. "You've got to pay off all that debt."
Consumer Credit Counseling--How Counseling Works
The Phyfes were about $4,000 in debt before they moved from Arizona to Connecticut. They knew they
wanted to buy a house someday and thus sought credit counseling to improve their credit and reduce
their monthly payments to make room for a mortgage. They went through debt proration-a kind of
financial workout-and the credit counseling service designed a plan specifically for them.
With debt proration, the counselor negotiates new terms with the debtor's creditors and then takes
the debtor's paychecks, pays the creditors each month, giving the client what amounts to an allowance.
"It's all set out up front how much you're going to get back, and it's tight," said NICE's
Reichbach. NICE, which is affiliated with Eastern Michigan University, runs consumer credit counseling
seminars and other classes related to personal finance.
Consumer Credit Counseling--Counseling Concerns
While the credit counseling service can help resolve debts, it cannot solve all of your credit problems.
And in some cases, the credit counseling services can even create new ones. Creditors have been known
to reject an application from people who have been through credit counseling.
"I thought counseling was going to be a positive reflection, but we actually got turned down for a
loan because of it being on there," Jennifer Phyfe says.
McNally and Gwen Reichbach, who directs the National Institute for Consumer Education, say there is
no way to predict how a given creditor-such as a mortgage lender-or loan officer will feel
about consumer credit counseling. But they suggest that the alternatives (loan default, overextension
and bankruptcy) look far worse on someone's record than credit counseling service. "If the debts get
paid off, that's got to look good," says Reichbach.
Consumer Credit Counseling--Credit Repair and Debt Consolidation
Free credit counseling differs from credit repair and debt consolidation, which are other approaches
debtors can take. Debt consolidation involves a loan and usually requires some type of collateral, such
as home equity. Repairing credit is really about challenging any errors, and even some items that are
perfectly valid, in one's credit history.
One technique used in credit repair is challenging every negative piece of information on a consumer
credit report, even the ones that are undeniable. Creditors have a limit on the amount of time they
have to respond to challenges. If they can't get to a challenge in a timely manner, the bad report is
erased.
Reichbach warns against credit agencies that claim that they can "wipe your credit clean," or
"eliminate your debts." If these pitches sound too good to be true, they are. "They aren't going to
know any more than you can learn yourself, in most cases," says Reichbach. "In credit counseling, you
may be taught how you can repair credit: You have to build a new, positive record."
