Credit Counseling: The Definitive Guide

In 2016, U.S. Bank conducted a survey in which they found that while Americans were optimistic about their financial futures, they felt far from reaching their potential. In fact, nearly half of the individuals polled expressed concern about paying their bills and only 41% had set up a budget.

While the survey pointed out that Americans would benefit from better financial planning, many individuals just don’t know how to go about making a plan. This is why credit counseling is a service that is so needed.  

What is credit counseling?

The main job of a credit counselor is to review your current financial status and come up with the best plan to help you get out of debt and manage your money. Most agencies offer credit counseling in a variety of platforms, including online over chat or Zoom, via telephone, or in person in one of the company’s local offices.

Since credit counseling agencies are typically non-profit organizations, their services are available at no cost. You may not even realize that the bank or credit union you do business with offers this service to its customers. Of course, there are for-profit credit counseling agencies out there, and if you go this route, you need to make sure the counselors are properly certified, and that the organization itself is reputable. The Better Business Bureau (BBB) is a great place to start when checking out a credit counseling agency.

How credit counseling can help

There are several ways credit counseling can help you improve your financial circumstances. They include:

  • Providing an analysis of your current financial health and identifying any problem areas.
  • Creating a budget that works for you and your family.
  • Recommending additional resources and classes that would help you understand and improve your finances for the better.
  • Negotiating with lenders to obtain a lower interest rate that will save you money over the course of your loans.
  • Helping consolidate multiple student loans into one, more manageable account.
  • Providing suggestions for first-time home buyers or renters who need assistance in making their rent payments.
  • Creating a debt management plan to help you conquer and eliminate your debt once and for all.
  • Helping you get a copy of your credit report from the three major credit reporting agencies (Experian, TransUnion and Equifax).
  • Helping small business owners separate their business income from their personal finances.

Is credit counseling right for you?

CNBC reported that the number one cause of stress in America is money. It leads to a lack of sleep and can put a heavy burden on a marriage. If you find yourself worried about your financial situation and you don’t have a clear action plan on how to improve it, you’ll benefit from credit counseling.

The Busy Budgeter says credit counseling is a good fit for anyone who is paying 20% or more of their take home pay toward unsecured debt and finding that making these payments is difficult.

Credit counseling is also ideal for individuals who need accountability, as the counselor will help you learn to be disciplined and stay on track with meeting your goals.

What to look for in a credit counseling agency

The National Foundation for Credit Counseling (NFCC) is the best place to start looking for a qualified credit counselor once you’ve ruled out that your bank or credit union doesn’t offer this service. The NFCC has been around since 1951. They have a national network of nonprofit member agencies that provide assistance through a variety of programs and services. All of the counselors are certified financial counselors and no one who needs help is turned away.

The Financial Counseling Association of America (FCAA) is another well-known agency with reputable counselors. It’s a member-supported 501(c)(3) non-profit national association with a mission to provide consumers with a referral to a financial counseling company that can help them with student loan counseling, bankruptcy advice, debt management and housing counseling.

When opting for a lesser-known credit counseling agency, you’ll want to only consider companies who have counselors that are accredited by the International Standards Organization (ISO) or by the Council on Accreditation (COA). Next, check to see if the agency is properly licensed and bonded to conduct business in your state.

If the agency you’re considering has the proper certifications, look to see how long they’ve been in business. You want to go with a company that has already proven themselves over the course of 7 to 10 years. Check for reviews from other customers who have used the company to determine whether their experience was positive or negative.

Finally, when shopping for a credit counseling agency, you need to make sure you go with a company that will give you the proper time and attention you deserve. Any meeting less than an hour isn’t enough to really look into your financial situation and come with a plan for improvement. The counselor should be able to provide you with a personalized budget and not a cookie-cutter print-out.

Agency warning signs

Credit counseling agencies that are not legitimate will often set off red flags that will warn you against using them. For example, any agency that promises to completely clean up your credit for a set fee is a scam. Improving upon your credit score takes time, whether you do it yourself or get a bit of help from a counselor. There are several factors that go into your credit score. Experian points out that one of these factors is the length of your credit history, and it makes up 15% of your score. An agency cannot alter the amount of time your accounts have been open and in use.

Another red flag is requesting upfront fees before any services have been provided. InCharge Debt Solutions points out that there is a law against requesting upfront fees and that the Consumer Financial Protection Bureau takes seriously any organization that violates this law.

Non-profit vs. for-profit credit counseling

Both non-profit and for-profit credit counseling agencies offer similar services; however, they are funded differently.

Non-profit agencies do not make money off of their customers. Instead, they receive funding from another organization, like a bank, credit union, creditor, or even the U.S. government. In some cases, they charge a very minimal fee to cover administrative costs, but in many cases the counselor’s services are free to the client.

For-profit credit counseling agencies, on the other hand, charge customers directly for their services. They do not receive funding from outside sources. Legitimate for-profit agencies have low monthly service fees, although they may also have a one-time set-up fee in the beginning. For example, Money Management International has an average set-up fee of $34 and an average monthly fee of $24. The company even has a hardship waiver and reduction of fees for individuals who qualify for the discount.

Chances are you need credit counseling because you aren’t able to make ends meet, which makes a non-profit agency the ideal option. Some would argue that since you aren’t paying the counselor, he or she won’t work as hard for you as a for-profit counselor would. For-profit agencies, however, can get quite expensive, as they often charge multiple fees. If you decide to go with a for-profit credit counselor, make sure you ask to see their fee structure before you sign on the dotted line.  

What is a debt management plan?

One of the services provided by a credit counseling agency is the creation and implementation of a debt management plan. The credit counselor negotiates on your behalf with each of your creditors to get a better interest rate, have any late fees waived, and obtain permission to be included in the debt management plan.

The agency is then able to combine all of the debts and create a repayment plan that requires the consumer to make just one payment each month. The counselor will be responsible for splitting that payment up and sending the money to the creditors who have agreed to the debt management plan.

Most debt management plans do not extend beyond five years and are only for unsecured debts. You can use them on a home mortgage or a car loan, as these loans are secured with your home or automobile as the collateral.

It is important to note that when using a debt management plan, the creditors will close out all of your accounts, so that you aren’t tempted to accumulate more debt. Remember, the goal is to help you completely pay off your debts without accruing any new debts. Closing out all of your accounts may negatively impact your credit score in the beginning; however, the score will improve as you stay consistent with your monthly debt payments. In fact, Experian states that making consistent payments on your debt will not only result in the re-aging of your account but will also reduce your credit utilization ratio. Both of these actions will cause an increase in your credit score.

What happens after signing up for credit counseling?

After you’ve made the decision to pursue credit counseling, you’ll need to call the agency of your choice and set up an appointment to speak with a counselor. You’ll want to bring information on all of your income, expenses and debts, as the counselor will not be able to provide an accurate analysis without it.

Next, the credit counselor will ask for your consent to perform a check of your credit. This will give the counselor a quick snapshot of where you stand credit score wise. If you’d like, you can request a free copy of your credit report from AnnualCreditReport.com and bring it with you to the meeting instead. Every consumer is eligible for one free credit report every 12 months.

Once the counselor has all of the necessary information, he or she will create a personalized budget, a review of your credit, and a detailed debt management plan. If you have any questions about the plan or the process, now is the time to ask them. You will then have the option of accepting the plan and continuing with the counselor’s help or taking the information home and attempting to work the plan on your own.

Conclusion

As long as you do your homework to ensure the credit counseling agency you’re interested in using is legitimate, there’s no harm in booking an initial consultation. You’ll have a chance to see how the counselor can help and you won’t be under any obligation to continue using the agency if you aren’t satisfied with the counselor’s recommendations. If the consultation proves fruitful, you could very well be on your way to a better financial future!