How Does Consumer Credit Counseling Work?
- Credit counseling can help you learn to budget and manage debt better.
- Credit counselors also administer debt management plans or DMPs.
- DMPs are plans you pay into once a month and your credit counselor distributes the payment to your creditors. Your counselor may negotiate lower interest rates and payments for you.
When you need help with budgeting and debt, you may turn to consumer credit counseling. Credit counselors look at your financial situation and propose solutions for tackling debt.
The types of services offered depend on the credit-counseling service, so it’s essential to understand what kind of help you need. It also helps to know how to find reputable, non-profit credit counselors.
What Is Credit Counseling?
Consumer credit counseling includes a range of services designed to help people who struggle with debt. A credit counselor looks at your finances and determines what help you need—education, budgeting advice, or a debt management plan (DMP).
Credit counseling is also called debt counseling, budget counseling, or financial counseling. A consumer credit-counseling service may operate on a for-profit or non-profit basis. Some credit-counseling agencies are free, while others charge fees.
How Consumer Credit Counseling Works
When you meet with credit counselors, they’ll first ask for information about your finances. The kinds of things they’ll ask about include:
How much debt do you have
What types of debt do you have, as well as the interest rate for each type
Your monthly income and expenses
Whether you have any other financial obligations, such as child support or alimony
If you keep a monthly budget, you might be asked to share a copy of it with the credit counselor. The credit counselor may also ask for your permission to pull your credit reports. That typically means a “soft” credit pull, which doesn’t affect your credit score. If you’re asked about a credit check, be sure you understand whether it’s a hard pull (which will affect your score) or soft pull.
Once the counselor understands your debt picture, the counselor may decide that you just need some debt-management education. But if your debt problems are getting serious, you might require a debt management plan, or DMP.
What Is a Debt-Management Plan?
Debt management programs (DMPs) are customized debt repayment plans brokered between the credit counseling agency and your creditors. The lower interest rates they can negotiate (typically through pre-arranged agreements) are referred to as a “concession rate.” The DMP includes a legally binding contract. You agree to make a specific monthly payment, typically at a lower interest rate, until the debt is paid off (two to five years on average).
You pay an initial set-up fee and monthly payments. During the plan period, the credit counseling agency collects “fair share” payments from the creditors per their agreements. Steer clear of agencies that have hidden fees, ask for “voluntary” contributions on top of the usual fees, charge for educational services, or ask for personal details before they fully explain their services.
Benefits of Consumer Credit Counseling
Seeking out credit counseling can help when you’re in debt and can’t see a clear way out. Some of the ways a consumer credit-counseling service might be able to help you include:
Reviewing your budget to find expenses that you might be able to reduce or eliminate
Negotiating lower interest rates on your unsecured debts
Getting late fees and other charges waived
Offering suggestions on ways to improve your credit scores
Enrolling you in a debt management plan
As mentioned, a debt management plan allows you to simplify and streamline your monthly payments. Instead of paying multiple credit cards or loans each month, you’d make a single payment to the credit counselor. The credit counselor then distributes the payment to your creditors. Your creditors may agree to reduce your interest rates or waive certain fees.
Debt-management plans can help you get out of debt faster—if you can stick with them. But if you’re unable to make the monthly payments as scheduled, or you charge up new debts, then a DMP likely won’t help your situation.
Who Is Consumer Credit Counseling Right For?
Consumer credit counseling could be right for you if you’re dealing with debt and need help paying it off. You might consider credit counseling if you:
Are mainly dealing with credit cards, medical bills, or other unsecured debts
Can’t seem to get ahead with debt repayment, no matter how much you fine-tune your budget
Are you open to exploring different options for debt relief beyond simply fine-tuning your budget
Have the means to pay any associated costs that might go along with a debt management plan, debt-consolidation loan, or debt settlement
Keep in mind that credit counseling isn’t a quick fix. And you have to hold up your end of the bargain to make it work. That means not taking on new debt while you’re trying to pay down old balances. If you’re enrolled in a DMP, you’ll need to stick to the plan and make payments as scheduled, too.
How to Find a Reputable Credit-Counseling Service
If you’re interested in finding a credit counselor to work with, you can start your search online. The key is to look for legitimate credit-counseling services with a good reputation. The National Foundation for Consumer Credit Counseling (NFCC) is an excellent place to begin looking.
Once you narrow down the candidates, you can go a step further and ask questions like:
What type of services do you offer?
Do you provide any free information or educational resources?
Do you charge fees for your services and if so, what are they?
What if I can’t afford to pay the required fees?
How are your credit counselors certified and what credentials do they hold?
Is your company licensed to offer credit counseling in my state?
How do you protect client information?
What kind of results can I expect from using your services?
You can also check Better Business Bureau ratings to search for complaints against a credit-counseling service. The attorney general’s office in your state may be able to provide additional information about complaints or lawsuits filed against a credit counselor.
What happens during credit counseling?
During a credit-counseling session, the counselor will review your financial situation and debt, then make recommendations about how to manage it. Credit-counseling sessions can take anywhere from 30 to 90 minutes and be completed over the phone or in person. Whether you pay a fee for this initial session can depend on which credit counselor you use.
Is a credit counselor worth it?
Meeting with a credit counselor could be worth your time if you’re tired of spinning your wheels with debt repayment. A credit counselor can offer an unbiased perspective on your financial situation and provide suggestions about managing your debt that you may not have considered.
What are the pros and cons of credit counseling?
Credit counseling can help you better handle things like budgeting, spending, and debt. A credit counselor can also recommend the best ways to manage and pay off debt. On the con side, credit counseling may be less effective in situations where your debt is too overwhelming to pay off, bankruptcy is inevitable, or you aren’t fully committed to getting out of debt.