If you feel like you don’t know how to keep your finances under control, you are not alone. According to Fortune, a shocking two-thirds of Americans can’t pass a financial literacy test. Meanwhile, millions of people across the country are in heavy credit card debt, many don’t have any money saved for retirement, and still more don’t know how to budget.
Wouldn’t it be great if there were organizations that helped Americans get educated about their finances? Believe it or not, there are. They’re called consumer credit counseling agencies, and they could have resources to help you get out of debt,
What Is a Consumer Credit Counseling Agency?
Consumer credit counseling agencies are typically non-profit organizations that provide money management advice and debt help for people who are struggling with their finances. If you need financial help, a credit counseling agency could help you:
- Improve your financial literacy
- Learn how to budget and save money
- Educate yourself about debt relief options
- Get out of credit card debt, medical debt, and other kinds of unsecured debt
- Find student loan counseling and bankruptcy counseling services
Consumer credit counseling agencies offer free workshops and resources that could help you with budgeting, debt management, saving money, and establishing long-term financial goals. Credit counselors who work at these agencies can also evaluate your budget, talk to you about your financial issues, and help you figure out how to improve your situation.
If you’re having trouble paying off your debt, a credit counseling agency could help. Depending on how much you owe, they could either give you resources and advice to help you get out of debt on your own, or offer a Debt Management Plan to help you eliminate your debt
What Is a Debt Management Plan?
Also known as Debt Management Programs or DMP’s, consumer credit counseling agencies offer Debt Management Plans to help you get out of debt faster and save you money by consolidating your debts into one monthly payment and working with your creditors to reduce the interest rates on your accounts and waive certain fees. Here’s how it works:
- You request an evaluation with a credit counselor. They will talk to you about your income, monthly expenses, credit card and debt balances, and other financial obligations. They will also pull your credit information with a soft credit check that won’t affect your credit score. After reviewing your information, they will discuss your debt relief options and let you know if a Debt Management Plan is right for you.
- If you qualify for a Debt Management Plan, your credit counselor will help you enroll. You choose which debts you want to enter into the program and decide how much you can afford to pay each month into your Debt Management Plan account, which your credit counseling agency will use to pay your creditors.
- Then, the credit counseling agency contacts your creditors to negotiate reduced interest rates on your debts. This reduced rate is called a concession rate. When your creditor agrees to the new terms, you countersign the agreement and start your Debt Management Plan.
- After your Debt Management Plan is set up, you pay a startup fee and then make monthly payments into an account that the credit counseling agency uses to pay your creditors. Your credit counseling agency will also collect a monthly fee for maintaining your Debt Management Plan.
- You continue to pay into your Debt Management Plan account and your credit counseling agency continues to make payments to your creditors until all of your debt is gone. This process could last anywhere from 36-60 months .
A Debt Management Plan isn’t for everybody, but it could be right for you if you feel you’d be able to pay off your credit card debt if you could just get a lower interest rate. Before you pursue a Debt Management Plan, though, it’s important to figure out if you’re eligible.
How Do You Qualify for a Debt Management Plan?
In order to qualify for a Debt Management Plan, your credit card, personal loan, medical debt, and other kinds of unsecured debt need to add up to 15%-49% of your annual income. If it’s any more or less, you may not qualify.
Generally, you also need to have at least $5,000 in unsecured debt in order to qualify for a Debt Management Plan. And you need to prove that you are able to make monthly payments into your Debt Management Plan each month before a consumer credit counseling agency will let you enroll. Before signing up for a Debt Management Plan through a local or national credit counseling agency, make sure you know the pros and cons of working with a consumer credit counseling company.
Credit Counseling Pros and Cons
Just like any other debt relief option, working with a credit counseling agency has its pros and cons. It’s important to understand these tradeoffs before making a commitment to join a Debt Management Plan.
Benefits of Consumer Credit Counseling
If you’re struggling with high-interest debt, a credit counseling agency could help you consolidate your outstanding debt into a single account and pay if off faster and at a lower interest. In fact, enrolling in a Debt Management Plan through a credit counseling agency could get you out of debt in 36-60 months. Since your interest rate will be lower when you enroll in a DMP, you could save money on your debt using this debt relief option.
Depending on the terms that your credit counseling agency works out with your creditors, you may even be able to pay less each month with a DMP than your current minimum payments. Additionally, a Debt Management Plan has a minimal effect on your credit score—which is not the case with every debt relief option.
Even if you don’t enroll in a Debt Management Plan, credit counseling agencies could help you learn how to manage your finances better. They offer free resources and financial education courses to help you build a better relationship with money management, budgeting, and more. So if you’re looking for ways to improve your finances, seeking out a credit counseling agency could benefit you.
Downsides of Consumer Credit Counseling
While credit counseling is a good option if you have a modest amount of debt, there are downsides to working with a credit counseling agency. It could be hard to qualify for a Debt Management Plan, especially if you have a large amount of debt and not enough income. And even if you are able to enroll, you will have to pay a startup fee plus a monthly fee for letting your credit counseling agency manage your debt repayment.
Your enrolled credit card accounts will be frozen during your Debt Management Plan, meaning that you will not be able to charge your enrolled credit cards while working with a credit counseling agency. When credit card companies see that you are on a Debt Management Plan, they may also avoid extending additional credit to you—so you may want to leave one of your credit cards out of your Debt Management Plan, or build up an emergency fund before you enroll.
If you are unable to make monthly payments into your DMP, your plan may be cancelled, leaving you with the same high interest rates that you started out with, plus any additional penalties and fees your credit card company can charge you.
Finally, while a credit counseling agency may help you reduce your interest rate and waive some of your account fees, a credit counseling agency cannot help you reduce the principal amount you owe. So if you owe a massive amount of debt, other options like debt settlement could be a better solution for you. By negotiating with your creditors to reduce the total amount you owe (not just the interest rate), debt settlement could get you out of debt for significantly less than a Debt Management Plan. You can learn more about debt settlement here.
|Credit Counseling Pros||Credit Counseling Cons|
|Good option if you owe $5,000+ in credit card, medical, or personal loan debt||Debt must be 15%-49% of your annual income in order to qualify|
|Lowers the interest rate and waives certain fees on your debt||Will not reduce the principal amount you owe|
|Could get you out of debt in 36-60 months||Requires you to pay startup fees plus monthly account management fees|
|May cost less than current minimum payments||If you are unable to make payments, your DMP could be null and void and your interest rate could be the same as before you enrolled|
|Minimal credit impact||Credit card accounts are frozen|
If you feel you are a good candidate for credit counseling after learning about the pros and cons of this debt relief option, your next step is to find a reputable credit counseling agency in your area.
How to Find the Right Credit Counseling Agency for You
No matter if you’re looking for help with your budget or you need to enroll in a Debt Management Plan, it’s important to do your research before you contact a credit counseling agency. Here are a few resources that could help you find a credit counseling agency:
- The U.S. Department of Justice has a credit counseling search tool that could help you locate approved consumer credit counseling agencies in your area.
- The National Foundation for Credit Counseling (NFCC) also offers a search tool for credit counseling agencies near you. Since the NFCC is the largest nonprofit financial counseling organization in the U.S., you can trust the consumer credit counseling agencies they endorse.
- Websites like NerdWallet could help you find credit counseling agencies with online Debt Management Plans.
Not all credit counseling agencies are legitimate, so before you contact a credit counseling agency:
- Check out their customer reviews online
- Verify that they are licensed and accredited in your state
- See if they are a member of the NFCC
- Make sure they are accredited in your state
If they don’t meet these criteria, you may want to keep looking.
Even if a credit counseling agency seems legitimate, still keep your guard up if you contact them. Plenty of companies look good on paper but could end up being a scam. Here are some red flags that the credit counseling agency you’re dealing with could be a scam:
- Their credit counselors are not certified or accredited by a third party organization such as NFCC
- They try to charge upfront fees before they negotiate any new terms with your creditors
- They guarantee that using their service will improve your credit score
- They pressure you into a Debt Management Plan without telling you about your other options
- They aren’t upfront about their fees or how their Debt Management Plan works
If the credit counseling agency you talk to doesn’t raise any of these red flags and is open about answering all your questions about the services they offer, they could be the right choice for you.
Credit Counseling Agencies: The Bottom Line
Being in debt is stressful, and credit counseling agencies could offer multiple ways of helping you deal with that stress, from free resources to Debt Management Plans. With help from a credit counseling agency, you could be debt-free faster and for less than it would take to continue making minimum payments. But like all other debt relief options, there are pros and cons to credit counseling.
While it’s true that credit counseling agencies could help alleviate some of the pressure of high-interest debt by negotiating a lower rate with your creditors, if you’re deep in debt and having trouble just making minimum payments each month, a credit counseling agency may not be the best choice for you. That’s why it’s important to weigh all of your debt relief options before committing to any of them.
The Freedom Debt Relief How to Manage Debt Guide was designed to help you learn about lots of different ways to get out of debt, including consumer credit counselling. This free download will help you compare multiple debt relief options and find the best one for you. Download it now to start your journey towards debt freedom.