Credit counseling is a service that educates and guides consumers that are buried in debt and who are trying to gain control of their finances.
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Credit counseling is designed to help consumers avoid bankruptcy and escape living paycheck-to-paycheck. Credit counselors offer advice on budgeting, managing money and other basics of finance. They assist people unsure of how to approach creditors about a settlement, or a payment plan and walk them through the process.
Certified credit counselors – also known as financial counselors -- educate consumers on the root cause of debt. They provide tools that help people avoid past-due mortgage payments, maxed-out credit cards and dormant savings accounts.
The solutions to difficulties vary because the situation each consumer presents is unique. Many counselors suggest Debt Management Plans (DMP) as a solution, while others may point you to debt consolidation, debt settlement or bankruptcy.
“When someone meets with a certified credit counselor, they get expert advice for overcoming their most urgent financial challenges,” Bruce McClary, Vice President of Communications at the NFCC said. “Consumers benefit from a comprehensive review of their entire financial situation. Every counseling session is completely confidential with advice that is uniquely designed for each individual.”
In other words, the solution all depends on the circumstances of your situation and the resources you have available to eliminate debt.
What Happens in a Credit Counseling Session?
Time is not on your side when you start falling behind on credit card or loan payments. The situation gets worse rather than better so it’s best to reach out for help quickly.
Credit counseling is done largely over-the-phone or online, but can be done in-person at a home or office. Counselors conduct 30–40 minute interviews to gather information about your financial situation. They will ask questions about income, expenses, budgets and assets. It is best to have this information documented and available when you begin the process.
Counselors also ask questions about the circumstances that caused financial problems, steps taken to address the debt, cash flow available every month and any assets that could be used in solving the problem.
“Credit counselors help you explore different debt repayment strategies to manage your credit card debt and get you back on track,” McClary said. “Proactive measures are always best. I wouldn’t wait too long to get expert advice.”
The counselors are trained experts at evaluating the data, educating clients on available options and designing money management programs that help eliminate debt and stress. Every solution is customized to suit the consumer’s resources and needs with the final goal of eliminating debt.
Credit counseling can help with:
- Reviewing your credit report
- Making budgets
- Designing a Debt Management Plan
- Managing money
- Using credit to your advantage
- Bankruptcy counseling
- Loan counseling
How to Prepare for Credit Counseling
Block off about two hours from your schedule to focus on credit counseling and what you can get from it. The actual counseling may take less than an hour, but you’ll want to give yourself time to gather all your financial information.
Credit counselors ask a lot of questions about your income, expenses and debts, so make sure you know the answers beforehand.
- Income – Have your last paycheck for each source of income and make sure it shows your total income, amount withheld and total take home pay.
- Current debts – Be ready with a list of monthly payments, interest rates and loan terms for any mortgages, auto loans, student loans or other loans you might have.
- Credit card information – Organize your credit card information with current balances, interest rates and due dates listed with each card.
- Monthly expenses – Estimate how much money you spend each month on groceries, gas, bills such as utility, internet, cell phone, insurance, subscription services like Netflix and Amazon and anything else you pay for every month.
Selecting a Credit Counseling Agency
Finding a reputable credit counseling agency is similar to many important shopping ventures: know what you want; seek recommendations from friends who have used the service; and do research online to find out about a company’s practices and history.
As you research companies, there are some standard questions they should answer that will help you identify if they’re the right organization for you.
Some of things worth considering:
- Is the agency licensed in your state and accredited? Members of the National Foundation for Credit Counseling (NFCC) adhere to strict standards and regular audits for data security, counselor accreditation and customer service.
- Be certain the counselors are certified, preferably by the NFCC. Also, how does the agency pay its counselors? Be wary of counselors paid on commission.
- Does the agency offer educational workshops and reading materials?
- Ask for a contract. Get everything in writing, including fees, services, time to complete the program.
- Ask what happens if you can’t afford the fees or miss a payment?
- What steps does the agency take to prevent identity theft?
- Contact the state attorney general or Better Business Bureau for records of complaints and how the agency responded.
For-Profit vs. Nonprofit Credit Counseling
The Federal Trade Commission and the NFCC suggest you work with legitimate nonprofit credit counseling organizations. The nonprofit agencies offer counseling for free or at a minimal charge.
The NFCC, which certifies financial counselors and companies, has approved 57 nonprofit agencies in the United States. On the other hand, there are no for-profit companies that are accredited by the NFCC.
Financial counselors for nonprofits operate under strict state and organizational guidelines to insure they act in their client’s best interests. Nonprofits are frequently audited by states.
Nonprofits must demonstrate that they are acting in the best interests of all of their clients. Some nonprofits offer clients monthly newsletters with money-saving tips and stories of people who have gotten out of debt. They do community workshops and provide financial calculators that allow people to track their progress at eliminating debt.
Counselors at for-profit agencies often have incentives to sell company products and services. They may receive bonuses based on how many people they sign up for fee-originating programs. These programs may or may not suit your needs.
Dealing with a nonprofit does not guarantee legitimacy, but it is a step in that direction.
When You Should Use Credit Counseling
Credit counseling is most commonly used when individuals find themselves in an overwhelming amount of debt, but it isn’t exclusively for those in financial trouble.
In fact, being proactive and asking a counselor to explain credit card information or to help make a budget is a great way to avoid financial trouble.
“Credit counselors help optimize your budget to make the most of your income,” McClary said. “And if you’re having difficulties keeping up with living expenses, they can connect you with local resources to help get you through.”
If you start missing credit card payments, contact a credit counselor before you fall further behind. The earlier you get help, the easier it will be to correct any mistakes. You might be able to fix your situation with a DIY technique if you catch it soon enough.
That starts with budgeting, but it might include credit card refinancing, which involves moving credit card balances to a no-fee balance transfer card with an initial 0% interest for a certain number of months. That works if the amount of debt is low, but if you have a substantial amount of debt, you’ll need a more comprehensive strategy.
Either way, a nonprofit credit counselor can point you in the right direction.
Results from Credit Counseling
Data from the National Foundation for Credit Counseling showed that member agencies counseled 1.2 million consumers in 2017. The agencies reported that nearly 70% of those enrolled in debt management plans had either paid off or were paying off their debt in a 4- to 5-year window.
The NFCC also started its own credit counseling program called “Sharpen Your Financial Focus” to help people learn how to manage their money more effectively. Ohio State University surveyed participants in the program and found 68% say it helped them manage their money better and 73% said they are paying their debt more consistently.
The purpose of credit counseling is to put consumers in control of their finances and avoid bankruptcy.
If the consumer chooses to participate in debt management programs, debt settlement or debt consolidation, it is wise to allow a 3- to 5-year window to complete the program and eliminate debt.
If you expect it to take longer than that to settle your debt, it may be wise to file bankruptcy.
Asking for credit counseling has no effect on your credit score. However, participating in one of the programs offered by credit counseling agencies to pay off your debt will have an effect.
Lenders can make a note in your credit history that their account is being paid through a DMP, which won’t affect your score as long as the account is up to date and it eventually gets paid in full.
If you choose ƒdebt settlement, the lender will report the debt as settled for less what was owed and that almost always has a negative impact on your credit score.
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