How credit counseling can help you get out of debt
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BLUEPRINT
Updated 8:09 a.m. UTC Nov. 13, 2023
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With the current economic tumult, many people are struggling to keep their pocketbooks in order. Financial stress can have a significant impact on your mental and physical health, relationships and well-being. Whether you’re dealing with mounting debt, job loss or simply trying to build savings, credit counseling may help you take control.
Accredited Debt Relief
What is credit counseling?
Just like any professional service, credit counseling grants you access to expert knowledge. In this case, credit counselors specialize in personal finance management. They can provide individualized coaching to help you evaluate your unique situation, in addition to reviewing your finances, evaluating your debt levels and developing a plan to pay it off.
Credit counseling can be a great option no matter your income or station in life. While many people seek out support once they’re struggling, credit counseling is also available before financial problems arise, or start to bubble.
How do I find a credit counselor?
Credit counselors work for you, so you should interview them like you would a real estate agent or financial advisor. Ask them questions about your specific circumstances and determine if you’re comfortable working together.
- What services do you provide? Look for companies offering a variety of services including debt reduction classes, budgeting, and building savings.
- Do you offer educational services free of charge? Avoid organizations that charge you for educational materials or are unwilling to provide information without a commitment.
- Are there fees for your services? If so, are there set-up fees and/or monthly service fees? Obtain a written record of any fees for services.
- What happens if I’m unable to pay your fees or make contributions? Reputable companies should be willing to work with you even if you are struggling to pay their fees.
- What are your counselors’ qualifications? Seek out counselors who are certified or accredited by an outside organization.
- Is your company licensed to offer services within this state? You want someone who is eligible to help you.
- How are your employees paid? Avoid companies who pay employees on commission for the services you use.
Begin your search by reviewing the National Foundation of Credit Counseling or the Financial Counseling Association of America who both maintain lists of certified counselors. Remember, a reputable credit counselor should be upfront about their fees, if any.
What services are provided by credit counselors?
Since credit counseling is tailored to your unique circumstances, counselors can offer a range of services. Although the specific services offered by credit counseling agencies may vary.
Financial education
Understanding budgeting, saving and investing enables people to make informed decisions about their finances. Credit counselors provide educational resources and workshops to help clients understand credit and develop better spending habits. Improving your financial literacy can help you recognize and avoid predatory lenders, build (or rebuild) your credit and create a plan to save.
Debt reduction
Credit counselors help clients prioritize expenses and make payments towards outstanding debts. This may involve creating a budget to evaluate spending and reduce expenses. The intention is to identify funds that can be used in a debt repayment plan, which can include paying down the highest debt first or calling creditors to ask for a lower rate. While the counselor provides direction, the client manages their own debt payments.
Credit counselors may also work with clients to develop a debt management plan (DMP), which works somewhat like a personal loan. In this plan, your accounts with high interest rates are closed, and clients make payments at a lower rate to the credit agency.
Student loan management
More than 40 million Americans hold nearly $1.8 trillion in student loan debt. Credit counselors can guide you through income based repayment or deferral options. They are typically up-to-date on public service repayment plans and other loan forgiveness options.
Homeowner counseling
Homeownership is a key to building wealth and financial stability, so many agencies also offer housing counseling. Credit counselors may assist with finding affordable housing, avoiding foreclosure and accessing resources for first-time homebuyers.
Bankruptcy counseling
Credit counseling is a prerequisite for anyone who files for bankruptcy. The pre-bankruptcy counseling can educate you on the consequences of filing for bankruptcy and explore alternative solutions. If you’re seeking credit counseling to fulfill this requirement, the service must be provided by an approved agency.
Credit counseling vs. Debt settlement
Since both credit counseling agencies and debt settlement companies handle debt payments, it can be difficult to tell them apart. But there are significant differences between the two.
| CREDIT COUNSELING | DEBT SETTLEMENT |
|---|---|
Usually non-profit agencies
| For-profit companies
|
Positive impact on your credit score
| Negative credit score impact
|
Repays full principal
| Negotiates a reduced payment settlement
|
Supports regular debt payment
| Encourages clients to stop regular payments
|
Collection calls should stop once your creditor agrees to the debt management plan (DMP)
| Collections efforts may not stop
May incur additional fees
Not all creditors will work with your company, which may leave you with unresolved debt
Additional savings may be considered as taxable income
|
Credit counselors typically work for nonprofit organizations, credit counseling agencies or financial institutions.
A counselor helps you evaluate your current state, assesses your goals and helps move you toward greater financial health. Credit counseling takes a holistic approach, so they may look at the behaviors that lead to increased debt or provide education to help you avoid debt pitfalls in the future.
Credit counselors either empower you to pay your debt on your own or they oversee a DMP to provide the best opportunity to pay off your debt. While they may negotiate a lower interest or reduced monthly payment, these plans are designed to pay off your debt’s principal. As a result, credit counseling debt solutions can have a positive impact on your credit reports.
In comparison, debt settlement companies are usually for-profit and contact your creditors to determine an acceptable payment that will resolve your debt. Many debt settlement companies encourage clients to stop making regular payments to their creditors. As a result, those creditors may report your account as late or in default. Your credit scores will likely take a significant hit and you may accrue additional fees and interest during negotiations.
Not all of your creditors may want to work with your debt settlement company. In this case, you may be left with the penalties and fees for those debts that are unresolved through your settlement. And while a debt settlement plan may reduce how much you owe, any savings may be considered income and can impact what you pay on your taxes.
How to make the most of your credit counseling service
Getting the most out of your appointment depends on you. Being prepared for your credit counseling meeting can ensure you maximize your time.
Bring your records
Whether it’s a hard copy or digital record, make sure you bring statements for all your monthly bills. Look up the interest rate for all of your debt, including the current APR for your credit cards. You should also bring a copy of any communication creditors have sent you regarding late payments or accounts in default.
Prepare a detailed budget
This budget doesn’t need to be perfect as the counselor can help you if you get stuck. But bringing a record of your income and expenses provides a jumping off point. If you haven’t created a budget before, you can begin with this budget tool. Make sure to use your net income or take home pay, and if you round your expenses, plan to round up.
Be engaged
Be honest and upfront about your financial situation. Actively participate in the counseling session and speak up if their solution seems too difficult. Following the appointment, follow through on the action plan and stay in regular communication with the counselor for ongoing support.
Frequently asked questions (FAQs)
Managing a financial crisis can seem daunting, and once you’re in a crisis, you may not have the resources to get yourself out. Credit counselors can help you evaluate your options and provide new tools to resolve money troubles. They can also provide information or create a plan if you’re uncertain about where to begin.
In many cases credit counseling is provided free of charge. If you enter into a DMP, you may incur a one-time setup fee and a small monthly fee. These fees are regulated and are usually between $32 to $40 and no more than $79 per month, but fee regulations do vary by state. There may be additional fees for select services. Make sure to get all applicable fees in writing before agreeing to the service. Additionally, you have 3 business days to cancel a DMP at no cost to you.
A credit counselor provides a personalized evaluation of your expenses and can help you generate a plan to reduce debt, improve your credit, and build savings. They may work with individuals in person, over the phone, or through online resources. The goal of credit counseling is to help you get back on track financially and achieve long-term financial stability.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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