Credit Red Flags

Are you making only minimum payments on your credit card?

Are you using your credit cards to pay for things that you would normally pay for with cash--such as groceries? Are you unable to consistently make your bill payments on time?

Or are you using the leap frog approach--paying some one month, and other the next?

Are bill collectors calling or are you receiving overdue notices?

Are you falling behind on basic things like rent or utilities? If you (or your partner) lost your job would you be unable to sustain payment of your debt? Are you constantly worrying about how much money you owe?

If you answered yes to at least three of these questions, you're on your way to financial trouble.

If you said yes to more than half of these questions, chances are you're already in trouble, says Lydia Sermons-Ward, chief communications officer for the National Foundation for Credit Counseling (NFCC), in Silver Spring, Md.

And if you're in financial distress, you're not alone. Each year more than 1.5 million people contact NFCC members for help. According to the Federal Trade Commission (FTC), many people face financial crises at some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or simply overspending, it can seem difficult, but often can be overcome.

It's important to face the situation and figure out what you need to do to get out of financial hot water before it reaches the boiling point. While some people are able to recognize the early warning signs and devise a self-imposed spending plan to scale down their debt, others need credit counseling from a reputable organization, debt consolidation, or in an extreme case, bankruptcy. The FTC states that your level of debt, your level of discipline, and your prospects for the future will determine which one will work best for you.

Do it yourself

Just as when you go to a hospital, get the proper diagnosis before treatment.

If you want to try to fix things on your own, the first step the FTC recommends is to take stock of your current situation. List all your income, your debt, and go through your checkbook for the past several months to track where your money goes. Look at your fixed debt--your rent, your mortgage, car payments, and insurance premiums--and your flexible spending, including entertainment, clothing, and vacation expenses. You may be able to cut back on some flexible spending to tame your debt, without further putting your credit history in danger.

If you still need help, consider contacting your creditors directly to try to work out a modified payment plan. This only works if you do it before you're being hounded by collection agents--you have to show creditors early on that you're doing everything you can to pay your debts.

Credit counseling

If you're not comfortable dealing with creditors yourself, or feel overwhelmed by the task of getting your financial house in order, take advantage of the services offered by a reputable credit counseling service.

"Our NFCC members take a triage approach to credit counseling," says Sermons-Ward. "Just like when you go to a hospital, it's appropriate that you get the proper diagnosis before treatment." When you go to a member agency, you're dealing with professionals who have been trained in money management. They will do an assessment to determine your stage of credit trouble. If you're in the early stages of debt, like one-third of NFCC clients, you'll receive some advice, an action plan, and a budget, so that over time you'll be fine.

Another third find they're beyond the early stages and in deeper trouble. People in this group have missed two or three months of payments and are receiving collection calls on their past-due accounts. "At that point it may be necessary for clients to go on a debt management plan," says Sermons-Ward. This is a formal repayment plan for your unsecured debt. "The agency serves as liaison between consumer and debtors--sometimes getting a lower monthly payment, reduced interest rate, and waiver of late fees." She cautions that it is entirely up to the creditor as to what they will extend to a client. "Once they have developed a debt management plan, the consumer then sends one payment to the agency, which disburses the funds to creditors. This guarantees that creditors are paid, and paid on time. It also sends a signal to the creditor that a client is trying to improve the situation by getting help," adds Sermons-Ward.

Credit unions, with their commitment to putting members first and emphasizing consumer education, are always eager to get people the help they need. John Tippetts, CEO of American Airlines Federal Credit Union, in Dallas, says helping members improve their financial welfare is the credit union's role in life. Whether helping members budget, plan for retirement, or manage their debt, the credit union is there to help.

Lori Mayfield, credit counselor with American Airlines, says a better-educated consumer is a smarter consumer. They back up this philosophy by training credit union employees to spot trouble and make referrals. Mayfield says their loan officers may refer a member to the credit counseling department (CCD) after a loan request has been denied. On the other hand, if a loan officer grants a hardship loan or believes the member would benefit from budget or credit counseling, he or she sends a referral to the CCD.

A better-educated consumer is a smarter consumer.

"Along with a workable action plan that fits the individual member's needs, our counselors offer in-house budget analysis and creative financial advice. If needed, the counselor will work with our special assistance department and our work out loan committee to lower the credit union loan payments. Not all of our members seeking financial counseling are in financial distress; they may simply want to develop a sound financial plan to become debt-free. We use a computer program to show members different ways to 'attack' their debt," says Mayfield. The CCD also has an outreach program designed to assist members who have experienced several returned checks due to nonsufficient funds. If members cannot handle a self-managed debt repayment plan, they are referred to an outside nonprofit service provider.

"We work with two or three different credit counseling services," says Tippetts, and they communicate with creditors to renegotiate debt and get the member back on track. Mayfield says they often will set up a separate account for the member; the counseling service drafts the monthly payment from the credit union account. "This service makes the process less painful," she adds.

The remaining third of NFCC clients are people in dire financial distress, says Sermons-Ward. "Those consumers tend to have other underlying problems that need to be addressed before the financial situation can improve. Some are referred to social service organizations for mental health, addiction, and medical issues," she says. Some may have to file for bankruptcy and they need legal advice.

"Some folks may ask what the NFCC gets out of it," says Sermons-Ward. "Some creditors expend a fair share payment for us helping to aid clients in repaying their debt. This is a voluntary arrangement--anywhere from 4% to 8% of the money that the agency helps recapture. These funds are contributions that help subsidize our free or low-cost services." Without them, she says, NFCC member agencies would have to charge excessive fees like some other groups.

Published October 14, 2002