A Complete Guide to Credit Counseling

Find out if a credit counseling is an option for you. See if you qualify for a free consultation with a leading credit counseling organization.

Finding yourself with credit problems is easy. Getting out from under debt can sometimes be a little more difficult. However, there are solutions. One of which is credit counseling.

What is credit counseling?

Certified Credit Counselors are personal credit counselors who are able to look at your financial history and design a plan that will balance your expenses and debts with your income and financial goals. They have been specifically trained in subjects such as counseling, budgeting, credit and collections, and debt management.

Here’s how it works.

After reviewing your financial situation, your counselor will offer you possible solutions and help you develop a monthly budget, taking into consideration your current living expenses and your debt to creditors. You will learn to rid yourself of unnecessary expenses, develop better credit habits, and live within your means, and all in a confidential manner.

Fees for credit counseling services vary widely and may include:

When you look for a credit counseling service, be sure to:

  • Choose an accredited agency. In the U.S. that means accreditation by the Council on Accreditation (COA) or the International Organization for Standardization (ISO). In addition, they should belong to the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA).
  • Ask if they are licensed. While not all states require licensing if your state does you need to be sure the service meets this requirement.
  • Find out about complaints. See what their clients say about them on SuperMoney’s credit counseling review page. Check with the Better Business Bureau. Their reliability report on the company will provide information on all unresolved complaints. Additionally, check with your state attorney general and any regulatory authorities.
  • Ask lots of questions. Before you hand over any money or personal information, a reputable credit counseling firm will answer your questions, such as the certification and qualifications of their counselors and the confidentiality and security of your personal information.

Creating a Formal Debt Management Plan

One part of the credit counseling process may be to develop a formal Debt Management Plan (DMP). Though you can choose to get help with a budget only, a DMP has advantages. They frequently offer improved credit terms, lower interest rates, and reduced or waived charges with your creditors, making it easier to repay your debts.

Your credit counselor will design a DMP specific to your personal situation by arranging a payment schedule for how you will repay your debts. You voluntarily agree to deposit a set amount each month with your credit service. Your credit service then distributes these funds to your creditors according to the schedule.

It is important to note that participation in a DMP may have a negative effect on your credit rating. However, creditors have different credit reporting policies. Your counselor can answer any questions you have about the impact on your creditworthiness.

Keep in mind that you cannot use your lines of credit while you are repaying them through a DMP. In fact, some experts suggest closing these accounts to avoid temptation. Your goal is to get out of debt.

Finally, only unsecured credit accounts, such as credit cards or an unsecured personal loan, may be included in a DMP. Home and car loans, unpaid medical bills, and similar debts are not eligible.

Credit Counseling Isn’t for Everyone

There are a number of benefits in using credit counseling, including free personal finance education and help with negotiating rates and fees. However, it is not something that you should enter into lightly.

One of the hardest hurdles that many people face is the commitment. If their debts overwhelmed them before, it can happen again.

Also remember that, unlike debt settlement, credit counseling will not lower the amount of money you owe. If you cannot afford the payments arranged by the credit counseling organization, you could be in the same spot with nothing to show for it but wasted time and additional fees.

WEIGH THE RISKS & BENEFITS

Although credit counseling can help in some cases, it is not for everyone. Here is a list of the benefits and the drawbacks of credit counseling.

Pros
  • May lower monthly payments
  • Counselors can negotiate extensions with creditors
  • Lenders may accept requests to lower interest rates and waive fees
  • You may learn how to manage your finances better
Cons
  • No reduction in the debt owed
  • It could hurt your credit score
  • Additional fee accrual

How to choose a credit counselor?

  • Ask whether they are licensed in your state
  • Look for a counselor that offers a wide range of services, such as budget counseling and debt management classes.
  • Check whether they offer in-person counseling or free educational materials.
  • Ask for the list of fees and a firm quote for their services in writing.
  • Find out if employees are paid a commission when you sign up for certain services or make a donation.
  • Avoid organizations that "sell" a debt management plan (DMP) as the only solution without analyzing your personal financial situation.
  • Check what clients say about an agency before you commit.

What do credit counselors do?

A good credit counselor will discuss your financial situation and help you create a personalized plan to solve your financial problems. This may include:

  • Give you advice on managing your money and debts
  • Show you how to develop a budget
  • Teach you how to get a copy of your credit report and scores
  • Offer free educational materials and workshops
  • Develop a “debt management plan” to pay down your debts