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- Credit counseling helps consumers manage debt, set budgets, and repair credit.
- Credit counseling services offer debt management plans, where counselors negotiate loan terms with creditors on behalf of the consumer.
- Credit counseling services can be helpful, but you need to vet these services carefully.
As of the third quarter of 2022, the Federal Reserve of New York reports that Americans hold just under $930 billion in credit card debt.
Credit counseling is both a preventative and remedial solution to growing consumer debt. A credit counselor can offer guidance on money management and help you tackle your debt.
What is credit counseling?
Credit counseling, also known as debt or financial counseling, is a process where licensed professionals help consumers resolve their financial challenges, like debt management and budgeting. Depending on the counselor's training, they may also provide pre-bankruptcy, housing, and other specialized counseling for your unique situation.
If you have a mountain of credit card debt, your credit counselor will work with your creditors to reduce your interest rates, lower your monthly payments, waive your late fees, and consolidate your debts.
"By working with a credit counselor, individuals can gain the tools and knowledge they need to regain control of their finances and achieve financial stability," says Michael Ryan, former financial planner and financial coach at MichaelRyanMoney.com.
How is credit counseling different from debt settlement?
While credit counseling organizations and debt settlement companies may negotiate with your creditor on your behalf, the main difference between these services is what they ask the creditors for.
Nonprofit credit counseling organizations can help negotiate the terms of your payments, such as interest rates or payment periods, to make your debt more manageable. However, the amount you ultimately owe won't change. They can do this at an affordable price without seriously impacting your credit score, explains Ryan.
On the other hand, debt settlement companies negotiate with your creditor to see if they can reduce the amount you owe, though this could significantly impact your credit score. Debt settlement companies also charge a hefty fee for their services.
What happens in a credit counseling session?
Before you undergo a formal session, a credit counseling organization will arrange a free phone or in-person consultation with you and a certified credit counselor. The initial session usually lasts 30 minutes to an hour as your credit counselor gets a sense of your situation and the circumstances that led you into financial hardship. Your counselor may also request you pull a credit report to fix any inconsistencies on your file, which may boost your credit score.
Then your credit counselor will offer various strategies for getting out of debt and managing your money. They also often offer free educational materials to help you build financial literacy.
You may only need one consultation to gather tips on improving your financial situation. However, your credit counselor may recommend a debt management plan (DMP). With a DMP, your counselor works with creditors to lower your interest rates and monthly payments. You'll have to pay a small fee to participate in a DMP, so reputable organizations only offer this program if needed.
How to prepare for a credit counseling session
You want to get the most out of your credit counseling sessions, and preparing before your session can facilitate that. You'll want to bring financial documents illustrating the scope of your financial situation. Some records you may consider taking with you are pay stubs, invoices, and statements with your credit card bills and monthly expenses.
You'll also want to come to your session with financial goals around credit, debt, or anything else you want to bring to your counselor.
How to find a credit counseling agency
Choosing a credit counselor to can be overwhelming. However, you can narrow your options by vetting the agency they work for and asking several questions.
Step 1: Create a list of potential credit counseling agencies
Not all credit counselors will offer the same services. So, it's essential to identify what you need, whether it's budget counseling or a more niche topic like mortgage counseling. You can begin your research using the National Foundation for Credit Counseling (NFCC) and the US Department of Justice's search engine.
The NFCC is the oldest-standing nonprofit credit counseling agency. You can tap into its extensive database of credit counseling organizations and find a credit counselor that offers the services you need. Alternatively, you can phone 202-677-4300 or email info@nfcc.org to reach an NFCC representative directly.
The US Department of Justice also offers a search tool to locate credit counseling agencies in your area. However, its database is limited to advisors that specialize in bankruptcy counseling. Most of these counselors also offer other services, but the search engine doesn't provide the capability to filter through those various services. That's something you'll have to do yourself.
Step 2: Ensure the credit counseling agency is accredited and nonprofit
Alongside the NFCC and the US Department of Justice, several resources can help you identify an agency's accredited status. Most reputable credit counseling services are also nonprofit. For-profit agencies have financial incentives to sell debt relief programs instead of putting the consumer's best interest first.
- Financial Counseling Association of America (FCAA): Like the NFCC, the FCAA is a database of accredited credit counseling agencies.
- Better Business Bureau: (BBB): This organization provides information and rates businesses on legitimacy and trustworthiness. Check if an agency has a good reputation with the BBB. You'll also be able to read through customer reviews and complaints.
Step 3: Set up a meeting to inquire about an agency's credit counseling services
After assembling a list of accredited, nonprofit credit counseling agencies to work with, schedule a free preliminary consultation with each company. Before your meeting, gather your financial documents and form questions to ask during the session.
These are a few questions you can ask to find the right counselor for you, according to the Federal Trade Commission:
- What services do you offer?
- Do you provide free educational materials?
- Will you help me develop a preventative plan for avoiding future financial issues?
- What are your fees, and how should they be paid?
- What if I can't afford to pay your fees?
- Will I have a formal written contract with you?
- Are you a licensed counselor in my state?
- What are the qualifications of your counselors?
- What measures does the company take to ensure my information is kept confidential and safe?
- How are your employees paid?
Step 4: Sign up for a credit counseling agency
After conducting interviews with each counselor, pick one you feel most comfortable creating an ongoing relationship with and one who charges rates within your budget. Credit counseling is generally affordable; however, your counselor will require payment for the debt management plan (DMP) if recommended. As we mention in the previous step, this should be one of the questions you as in your free preliminary consultation. That said, states usually place limits on these fees. Nationwide, your credit counselor may only charge you up to $79 for DMP fees, according to Experian.
Can credit counseling hurt your credit score?
Credit counseling itself won't impact your credit. However, the same can't be said for any actions you take resulting from your counseling session. If the plan is effective and you stick to it, you could make strides in paying off your debt which may increase your credit score by building positive payment history and lowering your credit utilization ratio.
If you sign up for a DMP and your counselor requires you to close accounts, this may drop your credit score by a few points. Your DMP may be contingent on you making your minimum payments each month. If you miss any of these, you may also see your credit score drop.
Is credit counseling right for you?
Credit counseling is an excellent way to tackle your outstanding debt and improve your overall financial wellness at an affordable price. However, credit counselors don't offer services drastically different from what you can already do yourself.
If you don't have creditors hounding you down for a late payment and can reasonably manage your debt, you may want to forgo paying for a debt relief program. You can negotiate with your credit card company to lower your payments or settle your debts. If you're relatively accountable, you can set up a DIY debt payment program using the snowball or avalanche debt repayment method.
Otherwise, there isn't harm in seeking help, and credit counseling is an affordable and safe method for managing your debt.
Credit counseling frequently asked questions (FAQ)
What do credit counselors do?
Credit counselors help you improve your financial well-being by creating a debt and money management plan. They work with your creditors to lower your interest rates and make your monthly payments manageable.
Are credit counseling services legit?
Credit counseling services are legitimate if you work with a reputable and accredited agency.
Is debt counseling worth it?
Debt or credit counseling is worth the fee if you're struggling to get a grip on your debt and need assistance. Getting your debt under control may end up saving you money on interest.