Dear Michaela,
I’ve just read all of the frequently asked questions on your website. I’m thinking very seriously about enrolling in your program. I’ve heard through the grapevine that beginning in January ’06 that the credit card companies will bill 4% of the current balance instead of the current 1-2%. If that is so, I will not be able to afford all of my payments. Unfortunately, I ran up quite a credit card debt when I recently remodeled my house. I have been able to pay my bills, but if I have to pay 4%, I won’t have enough money to pay all of them.

I got a note from a competitor of yours, who I won’t mention. I called her and she said that it would cost me $5,000 just to get into the program. (That’s for the lawyer). She also said that I would have to stop paying my bills, or at least those that I wanted to put into the program. She said that it was on the up and up, but I’m not sure. I am a registered nurse and would like to retire in about 8 years with no debt. If you could help me, I’d sure appreciate it. I’ve never done anything like this before, so I have a lot of trepidation and questions.
Thank you very much for your time.
Concerned Consumer

Dear Concerned,
Good Morning!
Thank you for your interest. It is true that the Comptroller of the Currency has required card issuers to re-adjust their formulas for calculating minimum payments on credit cards and they must be in compliance early in 2006. The formula must allow for a reduction in the principle balance of 1% every month when the minimum payment is made, including fees, charges and interest. So depending on the interest rate and fees, the minimums for most cards will soon be between 3% and 5% of the balance. I’m glad you caught this because I fear many people will be blindsided by the change, especially since it will come after the holiday season in addition to rising fuel costs.

Most organizations that offer credit counseling have gone to the effort to establish relationships with the major creditors either through long years of association, through completing certification requirements of the creditors or by becoming accredited through a nationally recognized organization. Credit Advisors Foundation has done all three. Because of this, creditors agree to make certain concessions on accounts involved in debt counseling regarding interest rates and late and over limit charges in return for a promise of commitment to repay the entire debt and to seek education that will allow the individual to become a better informed consumer.

So far, because they waive late fees and over-limit charges and reduce interest rates charged, none of the major creditors have indicated that the payment calculations for accounts involved in a Debt Management Program will change. This will allow these accounts to have a smaller minimum while on the program. The goal of debt counseling is not to get the smallest payment possible, but rather, to create a budget that allows you to dedicate the most that you can afford to your debt while still maintaining your household and family commitments. The creditors rely on the fact that as some are paid off, the funds that were going to the paid in full creditor will then be redistributed to the remaining creditors. This is how people get out of debt faster than the 20-some years it takes to pay off credit cards when only the minimum is paid each month. Eventually, there is only one creditor left who is receiving the full amount of the budgeted payment.

When you go through an interview with one of our certified credit counselors, they should be able to tell you if we can be of assistance, and if so, how long the program will last. That should assist you with your retirement planning.

One word of caution as you seek assistance with your debt. There is no state, federal, or accrediting authority that will allow a sign up fee of $5000 for a credit or debt counseling organization. Nor will any creditor cooperate with a credit counseling organization that charges such a set up fee. While all organizations have some sort of fee to cover the initial cost of setting up the program, I know of no state statute that allows a set up fee of over $75. The organization you have contacted is either a lead generator for a bankruptcy attorney or is a debt settlement company. In either case, they are not a credit counseling organization.

Ultimately, the differences in how creditors are treated (how soon and how often creditors are paid, for example) between these types of companies can greatly influence whether or not you have a credit report that screams “high risk” to lenders or a healthy credit report reflecting your creditworthiness, at the end of your program when your debts are paid in full.

Please contact us as soon as possible. You can reach a certified credit counselor at 800 942-9027.