Hundreds of credit counseling agencies across the county offer help for individuals with financial problems. Most of them provide counseling by phone, through the Internet, and/or in their offices.
These agencies offer four main types of services:
1. Basic Debt and Budgeting Review. A counselor will review your budget and debts with you to help you figure out how to adjust your spending so you can pay down debt and start saving. He or she will also help determine whether you can afford your payments on your current income or whether you need additional help.
Cost: This budgeting counseling session is typically free, but there may be a nominal charge of $20 - $50, sometimes less.
2. Debt Management Programs. If you can afford to pay back your debts in five years, the agency may recommend that you enroll in a Debt Management Program (DMP). If you do, you will make one monthly payment to the agency, which will then distribute payments to each of your participating creditors. You must close all your credit card accounts. The benefit of a DMP is that many creditors will reduce interest rates and fees so that you can get out of debt in five years or less.
Cost: You may be charged a nominal monthly maintenance fee, though it is waived in hardship situations.
3. Mandatory Bankruptcy Counseling and Education. If you file for bankruptcy, you will have to show the court that you received mandatory pre-bankruptcy credit counseling. If you are deeply in debt, or if your income has dropped, make sure the counseling agency is authorized to provide you with a certificate showing you received this counseling (so you’ll have it if you need it). Additionally, before your bankruptcy can be completed (discharged), you will have to show you completed a required financial counseling course. That course will likely be provided by the same agency.
Cost: Around $50 for each course. Again, the fee is waived in some hardship situations.
4. Housing Counseling and Education. Some counseling agencies also provide foreclosure prevention and mortgage delinquency counseling for consumers who are having trouble paying their mortgages; first-time renter and first-time homebuyer education courses; and mandatory reverse-mortgage counseling. Cost: Some of these programs are free, while there is a small fee for others.
Credit counselors typically cannot negotiate certain types of debts such as student loans, auto loans, etc. though they may be able to offer referrals to other resources that can help. In addition, many agencies provide referrals to local service organizations that may be able to help with delinquent utility bills, affordable housing, and other social services.
Tip: If you or your family member belongs to a labor union, you may be eligible for a free consultation from the Union Plus Credit Counseling Service. Additionally, union members who successful complete one year in a DMP through this program receive a refund of the first year’s fees.
How Credit Counseling Affects Your Credit
For many years, participating in a credit counseling program had a significantly negative impact on your credit scores. This has changed, however. Several years ago, FICO, creator of the popular FICO credit scores, changed its scoring system to ignore the fact that consumers are paying their debts through a DMP.
You will have to close your credit cards when you enroll in a DMP, however, and that will affect your credit. If you successfully get out of debt with a counseling agency´s help, however, you will usually find that your credit scores improve, since carrying a significant amount of debt hurts your scores. One counseling agency reports that their clients raised their credit scores by an average of eleven points by paying off their debt through a DMP.
How to Find Quality Credit Counseling
Most counseling agencies are non-profit organizations, but that is not a requirement, nor does non-profit status ensure that a counseling agency is “good.” In addition to the fees charged to consumers, they may receive contributions from creditors, who give a portion of the payments they receive through the counseling agency back to the counseling organization. This has led to criticism that these organizations are simply in the debt collection business. On the other hand, creditor contributions keep costs down for consumers.
You can receive a free debt consultation through Credit.com´s partners. You can read more about how to find a good counseling agency in our Learning Center.
You may also want to read about the new Call to Action DMPs that are designed to help more consumers get out of debt.