The topic of bankruptcy is discussed in more detail elsewhere, but as an introduction to the subject of credit assessment, there are two key concepts you might hear about if you slide into credit trouble: credit counseling and credit repair.

Neither is the best solution for rescuing a bad credit situation — the best solution is getting proper advice and settling things on your own, even if it means negotiating directly with your own creditors. In any event, the following information should convince you that the best approach against problem credit is to avoid problematic credit practices before you even consider taking out an application for a mortgage, a car loan, or a credit card.

Beware What You See on Television

If you've ever watched those television ads in the wee hours that show people cowering from their ringing telephones so they won't have to talk to one more bill collector, you've come into contact with the credit repair industry.

Credit repair agencies may advertise themselves as profit or not for profit, but they're getting money from somewhere to pay for those expensive ads. It's simple. They charge you to “clean up” your credit, as if there's a magical solution they have that you don't. Don't believe them. Does any of these promises sound familiar?

• “We can erase bad credit!”

• “We'll cut your balances by at least 30 percent!”

• “We'll boost your credit score to 720 in a year!”

Essentially, many credit repair companies are glorified lenders. They'll advertise free counseling, create a balance sheet, and set up a payment plan that they'll use to pay off all your debt. Then you'll pay the agency back at interest that may be significantly higher than you could negotiate for yourself dealing with your creditors directly.

The FTC points out the following as red flags:

• A credit repair company employee asks you to pay for credit repair services before they do anything

• The counselor doesn't tell you your legal rights or instruct you on what you can do for yourself for free

• The counselor advises against contacting any of the three major credit reporting agencies — Equifax, TransUnion, and Experian — directly.

• The counselor suggests you try to invent a “new” credit identity — and then a new credit report — by applying for an employer identification number to use instead of your Social Security number. (This is illegal, and if you do it yourself or with help, you may risk prosecution.)

Credit Counseling: A Slightly Better Option

A nonprofit consumer credit counseling service will work with you to create a similar balance sheet, but instead of offering you an above-market-rate loan to pay off your balances, they will go directly to your creditors and arrange for lower rates, forgiveness of late fees and other charges, and set up a repayment plan directly with them.

These agencies get a commission from various creditors — particularly credit card companies — as a fee for getting them their money. You write a check to the agency each month for the total of the payments, and the agency pays your creditors directly. Once your debts are paid, the arrangement is complete.

The nonprofit agencies also work with the consumer to help them set up a money-management program so that they can avoid future credit problems. There is normally no charge for this service, but the agencies do accept and encourage donations from people who may be able to afford this.

Credit counseling is generally a better proposition than credit repair, but it's not foolproof. Do the following before you make a move:

• Check with local consumer agencies about reliable credit counseling services in your community. Check which agencies your local media consults when talking about credit counseling, and check in with the local Better Business Bureau (BBB) to see if it has obtained complaints on the agency.

• Watch carefully for fees. Nonprofit credit counselors should send you free information about an agency's policies and activities without asking you at that point to provide any details about your situation. Check the range of services they offer. The best credit counseling agencies provide budget counseling and savings and debt management classes for a donation, not a fee. The FTC advises consumers against dealing with organizations that try to push you into a debt management plan (DMP) as your only option before they get a chance to look over your detailed financial situation.

• Know how their staff is paid. Understanding compensation is important. If the agency's staff is paid based on the services they sell, you're in the wrong place.

• Understand how you'll be paying off your debts. A debt management plan typically requires you to deposit money each month with the credit counseling organization, and it pays your debts in exchange for a lowering of fees and balances by your lenders. Reputable consumer credit services offer such plans, but since you might be in one for more than two years, you need to understand how they work.

• Make sure your bills are actually getting paid. If you reach an arrangement to pay future bills through an agency, there's no absolute guarantee they'll pay your bills on time. You must still monitor due dates on all your outstanding bills and make sure the agency has made the payments. If they fail, call the BBB to alert them.

• Make sure everything you're doing with the agency is in writing. You need to know every service the agency will provide you and whether you'll always have the opportunity to discuss your situation with a counselor in person.

If you're considering credit counseling, remember you're not putting your credit situation in someone else's hands to clean up. To the extent that they can help you restructure and reschedule debt, these agencies are a help. But it's up to you to make sure payments are made and you finally solve your credit problem.