Credit-counseling agencies can help eliminate debt

Cindy Campbell owed $7,000 on her credit cards by the time she graduated college and was missing payments, paying over-limit charges and being hit with punitive interest rates.

So Campbell signed up for a debt-management program and paid a lump sum to a credit-counseling agency, which distributed the money to six credit-card companies. At the same time, she cut her spending drastically.

Good counseling agencies will review your finances and set up a budget free of charge. If appropriate, the agency will enroll you in a debt-management program, like Campbell's, which can lower your interest rates and wipe out penalties.

You shouldn't pay more than $50 to set up such a program, and then no more than 5 percent to 7 percent of your monthly payment as an ongoing fee, says Todd Mark, of the Consumer Credit Counseling Service of Greater Atlanta.

Campbell was free of debt, including a car loan, in three years, and she has never looked back. When a promotion doubled her salary, she began saving for a home down payment and took steps to improve her credit score. She bought a house in 2005, at age 25, and qualified for a 6 percent mortgage.

When she ran up a credit-card balance paying for renovations to the house, she called her two credit-card issuers to see which had the better balance-transfer offer and found one for 5.99 percent. Recently, she again called her card issuer, told the service representative that she was a longtime customer who pays her bill faithfully, and managed to get a regular rate of 7.99 percent.

"Working to get out of debt takes serious discipline," says Campbell. "But it gives you more freedom."

Tips for erasing credit-card debt:

• Find extra money to put toward your bills. Cut back on spending, take an extra job, and devote gifts or bonuses to paying off high-interest cards.

• Call your card issuer and ask for a lower rate. Transfer your balance to a lower-rate card, but know the rules: Low transfer rates usually don't apply to new purchases.

• Seek help from your lenders if you're struggling to pay your bills. Banks generally waive over-limit fees and late penalties the first time you're delinquent. Ask to have your payment date moved to a more convenient time of the month.

• Contact a credit-counseling agency before you miss a payment. Find a reputable agency through the National Foundation for Credit Counseling (www.nfcc.org) or the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org).

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Kimberly Lankford is a contributing editor to Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.