STATE OF NEW YORK BANKING DEPARTMENT
GETTING OUT OF DEBT SAFELY
When to Go to a Credit Counselor for Help What is debt? Debt is money that you have borrowed and still owe for goods and services you have purchased. You don’t have to go on a wild spending spree to create a debt crisis. Debt can arise from emergency situations outside of one’s control but more often, a consistent pattern of spending even just a little more than you make, over time, can lead to an unsafe or unmanageable amount of debt. The key to gaining control of your debt is to first identify what is good debt and what is bad debt, and then pay off the bad debt. Good debt vs. bad debt: • Good debt is debt you have on items you need but can't afford to pay for up front without using all of your cash reserves or liquidating your investments. It is debt that can be seen as an investment and can help you build your credit rating if paid on time, such as a mortgage, car payments or student loans. Bad debt is debt you've taken on for things you don't really need and can't afford. The worst form of bad debt, of course, is credit card debt, since it carries the highest interest rates. Do not continue to borrow if you can’t make monthly payments towards the debt. Reserve your credit cards for emergencies. Try not to add to your debt load by making additional or unnecessary purchases. Do not use your credit card to borrow cash. Create a budget for income, and a debt payment plan. Do not spend more than you earn. Use your debit card, not your credit card, to make purchases. Pay more than the minimum amount due on your credit card(s) every month. Talk to an authorized account representative at your credit card company as soon as possible about lowering your interest rate and, if possible, arranging a payment schedule. As soon as a credit card account is completely paid off destroy the card and close the account. If all else fails, consider using the services of a licensed credit counseling company that might be able to help you pay off your debt.
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What can be done once debt becomes unmanageable? • • • • • • • •
To find the lowest credit card rates go to the New York State Banking Department’s Credit Card Survey at http://www.banking.state.ny.us/nyschome.htm What is a credit counseling service? • Credit counseling services, also known as debt management or budget planning services, help consumers pay off unmanageable debt. These companies can contact creditors to help arrange lower fees and interest rates (sometimes with better results than a consumer could normally negotiate) and can create a reasonable debt consolidation and/or repayment plan. Who benefits from credit counseling? • Anyone who is behind on bill payments to creditors can consider using a New York State licensed credit counseling service. • Anyone who is considering bankruptcy may also benefit from credit counseling. Declaring bankruptcy is usually the last resort anyone should take to solve financial problems. A bankruptcy petition can stay on your credit report for up to 10 years.
Diana L. Taylor, Superintendent of Banks www.banking.state.ny.us
One State Street, New York 10004 1-877-BANK-NYS
What services do credit counselors provide and at what cost? • For a fee, credit counselors will analyze debt load and recommend a strict budget, handle consolidated debt repayment or, in some cases, recommend bankruptcy; • They can help reduce monthly fees and lower interest rates, arrange to have late charges waived, over-limit charges dropped and have accounts returned from delinquent status to good standing in addition to stopping any harassing phone calls that a consumer might receive from creditors; and • In the case of consolidated debt repayment, credit counselors will renegotiate interest rates with each creditor. • Credit counseling is not free. Some credit counseling agencies charge fees that can range from 5-10% of a consumer’s debt. Others charge little or nothing for managing a plan and still others charge a fee equaling the equivalent of one month’s payment or a flat fee (usually under $50) and then a monthly fee (usually less than $25). Using automated payments can sometimes reduce your monthly fee. What to ask a credit counseling service about the services it offers: • Is your company licensed by the New York State Banking Department? • Are your company’s counselors accredited or certified? If not, how are they trained? • Is client money put in a separate trust account from your company’s operating funds? • Is there a minimum debt required to use your company’s services? • Will I have a formal written agreement or contract with your company? • Does your company ask for a voluntary contribution? • What is your initial fee? How is the amount of the monthly payment determined? • Will I work with one counselor or several? • Does your company offer free educational materials? If so, will you send them to me? • Does your company offer assistance with secured debts, such as car loans and mortgages? Is helping me plan for payment of these debts part of the services your company provides? • What assurance is there that personal information about me will be kept confidential? What to ask a credit counselor about your account: • Is a debt repayment plan my only option? • What are the consequences if I am not able to maintain the agreed-upon plan? • Do you work with my particular creditors? • Can you have my creditors lower or eliminate interest and finance charges or waive late fees? • How will I know my creditors have received payments? • What will my monthly fee be and can I reduce it by making automated payments? • How often will I receive reports on my account? • Am I able to access my accounts online or by phone? • Will you help me develop a plan for avoiding debt-related problems in the future? • Should I use my credit cards or apply for a new credit card while I am undergoing debt consolidation? • How soon can you take my case? • How long will it take to get out of debt? • Will credit counseling show up on my credit report? If not, why not? When choosing a credit counselor, consider the following: • Legitimate debt consolidation plans should never involve taking out new loans. • Never give out personal information, like a Social Security number or bank account number, over the phone. • If your secured debts are not included in your repayment plan you must continue to make payments to those creditors directly. If you fall behind on your mortgage, contact the lender immediately to avoid foreclosure. • Shop around. Compare the services and fees of at least three companies before you settle on the counselor or plan that best suits your needs. • Some universities, military bases, credit unions and housing authorities offer free or low-cost counseling. • Consumers should only use credit counselors that are licensed by the New York State Banking Department. A list of these companies can be found by visiting the Banking Department website at http://www.banking. state.ny.us/sibudget.htm or by calling 1-877-BANK NYS (1-877-226-5697).