Being in debt is no fun. The average American family owes $26,621 excluding mortgages, and most of that is high-interest credit card debt. That’s a huge burden, and it’s no wonder there are so many debt relief options available. If you feel that your debts are out of control you may be wondering what credit counseling is and whether it’s something you should explore.
What is Credit Counseling?
Credit counseling, also known as consumer credit counseling, can help you organize your finances, develop a budget, plan for the future, and tackle your debt. A credit counselor is an objective third party that can give you a new perspective on your financial situation and ways that you can improve it.
Credit counseling can help you deal with your overall financial situation, or with specific problems like credit card debt, student loans or mortgage/housing debt.
Who Provides Credit Counseling?
Most credit counseling agencies are non-profit organizations. Agencies are usually certified by a credit counseling association, like the National Foundation for Credit Counseling or the Financial Counseling Association of America. You can also find reputable credit counselors through the US Trustee Program. Your state’s attorney general office or consumer protection agency may also have information that can help you locate a qualified counselor.
🙋 Credit counselors are certified and trained in consumer credit, money and debt management, and budgeting.
How to Know if Credit Counseling is Right for You
Credit counseling isn’t necessary for everyone who has debt, but there are times when it makes sense to get a credit counselor’s help. The National Foundation for Credit Counseling suggests seeing a credit counselor if any of these criteria apply to you:
- You are using your credit cards to make purchases that you usually would pay for with cash;
- You are prioritizing your bills, meaning you are choosing to pay some bills and neglecting to pay others;
- You’re taking money from your savings or retirement accounts to satisfy some of your debt obligations;
- Your finances are causing stress or arguments at home.
You don’t have to wait until you are at the end of your rope to get help from a credit counselor. If you are struggling with debt or unable to set up or follow a budget, a credit counselor can assist you. Getting help before your finances become an issue is often a better choice than waiting until you’re already in trouble.
What to Look For
There are plenty of reputable credit counselors, but not everyone who offers credit counseling services has your best interests in mind. If you have decided to use a counselor’s help, approach your choice as you would approach any major decision. Know what you are looking for, do research online to find out about the company’s practices and philosophy, and talk with friends who may have used the service. Remember to look for counselors who have been certified by either the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Respected consumer credit counseling organizations will offer initial counseling and other services for free. Consider it a red flag if an agency pushes you to commit to their service or asks for upfront payment. Again, you will want to make sure that the credit counselor has been trained and is certified to provide you with the services you seek. Check with the Better Business Bureau and run online searches to get a sense of the agency’s reputation.
It’s important to feel comfortable with your counselor. A credit counselor should be able to listen to your concerns and provide options for you to consider. You should never feel pressured and coerced into any decision. A reputable credit counselor should provide you with free information about their services without requiring you to provide them with your details. The counselor shouldn’t request that information until you meet. If you’re not comfortable or if you feel like something’s not right, look for another counselor.
What to Expect When Meeting With a Counselor
If you decide to meet with a counselor, you’ll be more confident if you know what to expect. Depending on the agency, your meeting could be in person, on the phone, or in a virtual meeting. Expect that the initial visit will be 45 minutes to an hour. The counselor will gather information on your financial situation and ask questions to help determine your options and help you decide which of them is best for you.
Here are some questions that the credit counselor may ask:
- What is your household income?
- What are your monthly expenses?
- Do you have a budget?
- What debts do you have? For example, do you have a mortgage, student loans, credit cards with balances?
Have this information ready:
- A list of your current expenses, including housing, food, utilities, loans, and credit cards.
- Recent pay stubs so you can provide information on your income.
- Credit card statements so you can provide the minimum payment information, due date, and interest rate.
The counselor may also review your credit report. After reviewing your information, the counselor will use it to help you develop a plan of action to meet your financial goals.
If your debt problems are manageable, your counselor may simply advise establishing a budget and savings plan to meet your goals. If you’re having serious trouble managing your debts, the counselor could recommend a debt management plan (DMP).
What is a Debt Management Plan
A debt management plan is a tool that can help you get back on track with your financial goals. A certified credit counseling agency will help you set up a plan. After working with a credit counselor, the counselor will offer an agreement to enroll in a DMP. You will make one payment each month to the credit counseling agency, which will then use the funds to make payments to your creditors. Because credit counseling agencies have relationships with creditors, they may be able to negotiate lower interest rates and reduced fees on your behalf.
Enrolling in a DMP may allow you to have more breathing room in your monthly finances by setting up a plan with just one payment. You also have a light at the end of the tunnel, so to speak, because most debt management plans have your debts paid off in 3-5 years, as long as you make the payments as scheduled. Most debt collectors will leave you alone if you are in a debt management plan and making your payments.
💵 Keep in mind that while credit counseling is usually a free service, enrolling in a debt management plan comes with a fee.
Most agencies have an initial setup fee and then a monthly service fee. Some will waive the fee if the cost is too much for you, but that is not a guarantee. Also, be aware that the credit counseling agency may require you to commit that you will not apply for any new credit cards. This shouldn’t be an issue for you since you are trying to get out of debt, but you need to know that this may be a requirement.
Is a DMP Right for You?
A debt management plan may or may not be a good idea for your situation. A DMP works well if you have a lot of unsecured debt, like credit card debt. A DMP usually does not work with secured debt like a home or car loan. You also cannot use a DMP for student loan debt.
It is also possible to do the legwork that a credit counseling agency does on your behalf on your own. You may not be able to negotiate the waived fees or lower interest rates the agency can, but if the cost of setting up the DMP is more than you can handle and you have the time to negotiate with your creditors, it might be worth not using a credit counselor.
How Does a DMP Affect Your Credit
Some debt relief plans can affect your credit. You may be required to close credit card accounts, which can raise your credit utilization ratio and lower the average age of your accounts. That can have an impact on your credit, especially in the short term. A DMP usually will not have a long-term negative impact on your credit. You’ll be making regular on-time payments to your creditors through the credit counseling agency, which is good for your credit.
⚠️ If you miss a payment, your credit counselor could cancel your debt management plan. Your creditors could then report missed or late payments or send your account to a collection agency. That could have a significant impact on your credit.
The Choice is Yours
Whether your counselor suggests simple changes to your budget and spending habits or a debt management plan, the final choice is yours. Consider the counselor’s recommendations and take some time to think about your options. Don’t feel pressured to sign an agreement at this first meeting. If you think you are being pushed to sign any agreement, walk away and find another agency. A debt management plan may be a good idea, but you should not enter it lightly. Take some time to think about it.
⚠️ If you don’t fully understand the plan the agency is offering, ask for more information before making a decision.
If you feel like your debts are out of control, credit counseling can have real benefits. A certified credit counselor can provide you with tools to learn to budget and plan for the future. If you need more help, a debt management plan may be just what you need to get back on track and out of debt in 3-5 years. Just do your homework and find a reputable agency to help you.
Beware of anyone who tells you they can fix your debt problems or repair your credit overnight for a fee. Companies that tout that kind of help are not being honest with you and could be outright scams. A legitimate credit counseling company won’t pressure you, make extravagant promises, or require a fee upfront. They will work with you to find a solution that fits your needs and circumstances.