Sometimes, even the best of us need help — but when it comes to your finances, is it worth the cost?

With the rapid fall of the national economy still fresh in the minds of many American consumers, some have opted for the help of financial professionals and credit counseling services to help them pay off their debt, raise their credit score, and potentially land a reasonable interest rate on a future loan.

The airwaves today are littered with companies promising to negotiate with debt collectors and reduce, and sometimes even eliminate, your balances. While it’s always in your power as an educated consumer to inquire about their services, not every company has your best interests at heart. Take a Money Minute to discover what some of these credit counseling services really do, if they are a scam, or if they can genuinely help.


Know Credit Counseling Services… and Their Tricks

While true credit counseling services do exist, it has also turned into something as a catch-all term to describe companies that claim to offer consumers some form of debt relief. Here is a brief list of the services these organizations actually offer.


Debt Settlement

While many credit counseling agencies are non-profit, debt settlement companies are for-profit businesses that agree, with no guarantees, to negotiate with creditors to pay off your debts in a lump sum for a fraction of what you owe. If successful, they will charge you a fixed amount for every dollar the creditor settles for. Before negotiations begin, there is also usually an up-front fee required.

The tactics these companies use to negotiate with creditors can be extremely dangerous for consumers. Before beginning, most settlement agencies will require you to immediately stop making payments, causing your balances to accumulate penalties as well as interest. Not only could this drastically add to the debt you’ve already accumulated, this will also prompt debt collectors to pursue you more aggressively. In extreme cases, this could even lead to lawsuits.

Even if you do consider this option, you should also consider that many creditors already have standard policies in place for negotiations. This immediately caps how much a debt settlement company could save you. By reaching out and negotiating with creditors on your own, you can achieve the exact same result without the burden of upfront fees or penalties.


Debt Consolidation

Debt consolidation firms are different from debt settlement companies in that there is no debt reduction involved in the transaction; instead, consolidation firms offer to grant you a loan to cover your outstanding debt. In this situation the consumer benefits by bringing all their debt together under a single fixed monthly payment — ideally with a lower interest rate than your credit cards.

There are several different types of loans a consolidation firm could offer you. A personal loan could be an option, or if you own a home, you could opt to open a home equity line of credit with the property as collateral. Some credit card companies also offer credit transfer promotions with zero interest for a specified length of time, acting as a de-facto consolidation loan itself. If you are considering bankruptcy as a legitimate option, any of these options could be a reasonable alternative.

This option does come with drawbacks and risks, however. Lower interest rates and a single fixed payment sound appealing, but they only benefit you if you make a commitment to not contribute any more to your balance. If you have a substantial loan and additional overbearing debt, you could be in a worse position than you were in before. Also, note that these services are not free; both debt consolidation loans and balance transfers require an origination fee — usually between one and five percent of the loan total. Before making a decision, be sure to verify, either on your own or through a certified counselor, if the lower interest rate outways the origination fee.


Trusted Credit Counseling Services

A true credit counseling service is a non-profit organization that can offer financial advice and educational materials in an effort to help you develop a sustainable budget. The term “non-profit” can be misleading, however; while their first hour-long consultation is usually free, additional consultations will come with some form of cost, such as monthly payments. If you opt to enroll in the debt management plan they design for you, they may also take a percentage of the payments you send to creditors.

Credit counseling services, like the other services mentioned, can help you find a clear path toward debt relief, but before choosing to use them, keep in mind that they do not offer anything you can’t do yourself. By learning to read your credit report, develop your own budget, and make credit cards work to your advantage, you can right your own ship without the extra burden of additional fees.


Alternatives to Credit Counseling Services

If you determine that outside assistance is absolutely necessary, don’t be afraid to ask questions about what you precisely are paying for — or if there are any services offered at no charge. You’d be surprised what you could learn in a free, hour-long session; sometimes just some general advice about what direction you should take can be a great help.

As surprising as it sounds, many people find help outside of traditional credit counseling services. Robert Palmer’s RP Funding, for example, offers a free, six-month credit coaching program to help prepare potential homeowners for a low-interest mortgage. If you can shop around for a similar service, your credit will be all the better for it.