Debt can get complicated, especially if you have a lot of it. Credit counselors are trained professionals who help individuals and families work to get a handle on their debt so they can lay a stronger financial foundation for the future. How does credit counseling work? Find out more below so you can make a decision about whether this is a tool you want to use.
Credit counseling is often promoted as the best option for consumers who are having trouble managing debt. In fact, the Credit CARD Act requires credit card issuers to publish, on card statements, a toll-free number for consumers to get credit counseling help.
Credit counseling is exactly what it sounds like: A trained and experienced financial counselor works with you to understand your debts and assets. They then help you work out a plan to deal with your debts or offer advice about what other options might be available to you.
This isn’t a magic potion that dissolves your debt or improves your credit, though. Credit counseling requires you to be an active participant in the process. The counselor might help you create a budget, for example, but then you have to be willing to tighten your belt and follow the budget to make it work.
It’s also important to do your research to make sure you are working with a legitimate, certified credit counselor. Credit counseling is unlikely to help you if your credit counselor isn’t trained.
How Does Credit Counseling Work?
The exact process can differ somewhat depending on what organization provides the credit counseling and what your situation is. Here’s a look at some common steps that you might be a part of when you seek credit counseling:
You schedule an appointment with the credit counselor. This may occur in person or via video conference or phone depending on your preferences and the policies of the organization.
The credit counselor reviews your situation. Be prepared for this fact-finding meeting by gathering information beforehand. Copies of check stubs showing your income, a list of all your monthly expenses, and copies of all your bills for at least a month may be necessary. The credit counselor will want to know the balance on all your debt accounts as well as the interest rate you’re paying.
The credit counseling firm checks your credit. They run a soft credit check, so it won’t hurt your credit. This is to help ensure that all outstanding items are being looked at and help the counselor understand if you’re dealing with collections.
The credit counselor helps you create a plan. This might include options such as budgeting, debt settlement, consolidation loans, or debt management programs.
Once you agree to a plan, it’s often up to you to put it into action. Depending on what the recommendation was, you might work with other professionals to make that happen.
How Much Does Credit Counseling Cost?
If you go through a nonprofit credit counseling service, the counseling itself is usually free. Even for-profit debt management companies often provide a free consultation to help you understand what your options are. If you work with your credit counselor to set up a debt management plan (DMP), you will make a monthly payment to your credit counselor who will pay your creditors on your behalf. These plans may come with a small fee as well.
Working with a debt settlement company is different and typically does come with some fees, though. A debt settlement company helps you negotiate payment arrangements with creditors that are satisfactory for both you and the companies you owe.
The Pros of Credit Counseling
You work with experienced professionals. Professional credit counselors are well-versed in personal financial management and may know about and understand options you don’t. This could help you find the best solution for you.
You get third-party eyes on your situation. Sometimes, you’re so caught up in the problem and the emotions and stress of it, it’s hard to make the most logical choices. Credit counselors aren’t caught up in your stress and can help you see the big picture and move forward logically.
You can get advice for free. If you work with an organization that provides free credit counseling or a free initial consult, you can get some peace of mind knowing what your options are without having to pay for it.
The Cons of Credit Counseling
Credit counseling isn’t a magic solution. If you don’t have enough money to cover your debts or you’re going to have to tighten the belt a good bit to do so, credit counseling doesn’t change that. You may still have a lot of work to do going forward.
You may have to pay for services. Not all credit counseling is free, and this can add to your debt expenses. In some cases, the fees might be high enough that they make it harder to pay off your debt. Make sure you read the fine print and understand exactly what you’re paying for and how much.
You have to watch out for scams.Choose a good credit counselor by reading reviews and working with organizations that are established. Consider looking for a credit counseling partner that’s accredited by a national organization such as the National Foundation for Credit Counseling. If you enter into a debt management agreement, you may want to track your credit to ensure payments are being made in a timely manner.
Does Credit Counseling Hurt Your Credit?
Whether or not you sought credit counseling isn’t something that shows up on your credit report. So the act of credit counseling itself does not hurt your credit history or score.
However, some of the actions that are recommended by credit counselors might temporarily hurt your score. Settling debt, closing accounts, or adding new loans or balance transfer accounts that help you consolidate existing debt can all impact your credit score. In some cases, it might be that you’re taking a short-term hit to your score to help improve your financial standing in the long run— but this is always something to consider carefully.
Who Is Credit Counseling Right for?
Whether or not credit counseling is right for you is a personal decision. However, the best candidates for this option tend to be people with a lot of revolving or unsecured debt who do have the income to be able to cover their debts. They just need help creating a plan and getting finances in order to be able to do so.
Alternatives to Credit Counseling
Credit counseling isn’t the only way to get a handle on your debt. Here are some other options to consider.
Debt settlement. This occurs when you negotiate with a creditor to pay a lower amount than you actually owe. The creditor considers the debt paid off, but it shows up as “settled” on your credit report.
Balance transfers. You may be able to transfer high-interest credit card debt to a card with lower interest or even a 0% balance transfer This could help you pay your debt off faster.
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Consolidation loans. A consolidation loan occurs when you take out one loan and use the funds to pay off existing debt. Then, you only have to deal with making one payment, which might help you manage the debt better.
Bankruptcy is a last-resort option that may be necessary if you simply don’t have the income to pay all your obligations.
Credit repair. If what you really need help with is removing inaccuracies from your credit report, you might consider signing up for credit repair services.
Does credit counseling work? It depends on your situation and how willing you are to stick with what the credit counselor recommends. You also need to be sure you’re working with a reputable organization. Consider signing up for the Credit Report Card to keep an eye on your credit as you go through any type of debt management process.
