Whether you need help addressing a debt problem, advice about buying your first home, or assistance with a budget or credit repair, a credit counselor may be able to help.
Credit counseling agencies are typically nonprofit organizations. They employ certified counselors who have experience with consumer credit, money management, budgeting, and debt.
Depending on your situation and what you’re trying to accomplish, such as how to make enough money to keep up with your payments, a credit counselor can help you create a plan and point you in the right direction to get out of debt. Here’s what you need to know about how credit counselor works and how to take advantage of the service.
What Is the Purpose of Credit Counseling?
When most people hear the term “credit counseling,” they view it as a service to help people improve their credit and pay off debt. But most credit counseling agencies do a lot more than that.
“The primary purpose of credit counseling is to provide guidance for people who are seeking help with overcoming financial obstacles,” says Bruce McClary, vice president of marketing for the National Foundation for Credit Counseling, “and to provide financial education that helps them sustain a healthy financial lifestyle.”
Depending on the agency, that can include things like homebuyer education sessions, money management workshops, student loan counseling, and even financial coaching for small business owners.
Many of the services credit counselors provide are free, but some may come with an affordable fee.
One of those services, which is what credit counseling is best known for, is a debt management plan.
What Is a Debt Management Plan?
A debt management plan is a program to help you manage your monthly payments on unsecured debts, helping you get out of debt more quickly and often with a lower interest rate.
Once you set up a plan, you’ll make one monthly payment to the credit counseling agency, which will use the money pay your creditors. Credit counseling agencies have contracts with many creditors, often at interest rates between 8% and 12%.
So not only will you have just one monthly payment instead of several, but you can also save money on interest if what you were paying before was higher than what the agency offers.
Debt management plans typically last three to five years, and your monthly payments will be based on that timeline plus the contracted interest rate.
In the meantime, you’ll typically agree to stop using credit accounts, specifically credit cards. You may even be required to close the accounts entirely.
How Much Does This Type of Credit Counseling Cost?
While the initial consultation with a credit counselor is free, you’ll likely need to pay an upfront fee plus a monthly fee to get on a debt management plan.
“That fee covers the cost of providing the service,” says McClary, “which is the method of repaying your credit card debt with a single monthly payment while benefiting from lower interest rates and eliminated late fees.”
The fee schedule can vary by agency, but the average setup and monthly fees are $40 and $25, respectively. In some cases, you may be able to get the fee waived if you’re suffering from financial hardship.
How It Affects Your Credit
Being on a debt management plan won’t hurt your credit score in any way. When you get on a plan, you’re still making payments to your creditors — it’s just through the credit counseling agency.
In some cases, the program can actually help your score. “After enrolling in the program, most of the major creditors will re-age your account,” says McClary. “That means that, at the time of enrollment, participating creditors will bring past-due accounts current without making you pay the late amount.”
That said, creditors will also typically add a note to your credit report that the account is on a debt management plan. That note will generally remain on your report until you’re done with the plan, but it won’t change your credit score in any way.
That said, it does signify that you’re no longer paying as originally agreed. So if you’re applying for credit in the future and the lender sees the note on your credit report, it could consider you a risk and choose to decide to deny your application or approve you at a less favorable rate.
Alternatives to a Debt Management Plan
If you’re struggling with your finances, a debt management plan can help you get back on the right path. But it’s not the only option available to you. Here are a few others to consider.
1. Consolidation Loan
In most cases, it’s best to use a consolidation loan if you can get a lower interest rate than what you’re currently paying. If your credit is in good shape, that may not be too difficult to accomplish. According to the Federal Reserve, the average interest rate on a two-year personal loan is 10.12%, while the average credit card interest rate is 16.46%.
On the flip side, a debt management plan through a credit counselor doesn’t require great credit. So if you’ve made some missteps, it’s a better option.
2. Debt Settlement
Debt settlement companies specialize in negotiating with your creditors to reduce how much you owe. You’ll pay into an account with the debt settlement company — often instead of making your monthly payments to your creditors — until you have enough to settle.
Depending on how much you can afford, it can take months or even years to accumulate enough for the company to start negotiating. There’s no guarantee all your creditors will settle, but once you start seeing results, you could pay between $500 and $3,000 in fees — or more, depending on how much you owe.
The idea of paying less than what you owe might sound nice. But there are some caveats to consider. First, says McClary, is that any debt that’s forgiven is taxable.
Also, because you stop paying your creditors while you’re building up your settlement fund, your credit can get a lot worse before it starts to get better. As a result, debt settlement is usually best if your debts are already in collections.
If your situation is dire, bankruptcy may be your only option. A Chapter 7 bankruptcy may be an option if you’re suffering financial hardship. It involves liquidating some of your assets and eliminating most, if not all, of your debts.
Chapter 13 bankruptcy, on the other hand, sets up a payment plan over three or five years, enabling you to pay off all or a portion of what you owe.
Filing for bankruptcy costs just a few hundred dollars, but if you hire an attorney, it can cost you thousands. Also, a bankruptcy can stay on your credit report for up to 10 years. In general, bankruptcy is best when you’ve exhausted all other alternatives.
How to Know if Credit Counseling Is Right for You
If you’re just interested in getting help with money management, engaging a credit counselor is one of the best things you can do. These basic services are often free and include hands-on advice from an experienced professional.
If you’re considering a debt management plan, there are a few other things to consider to make sure it’s right for you. First, consider the cost.
A $25 monthly fee over five years is $1,500. If you’re in a position to tackle your debt and save that much or more in interest on your own, it may not be worth it to engage a credit counselor. If you feel like you’re drowning, though, spending that much over five years may be worth it.
Next, think about the monthly payments. “Even though you will likely receive a reduction in your monthly payment, interest, and other fees,” says McClary, “it still may not be enough to get you to get you to a place where you're financially stable.”
In a situation like this, bankruptcy may be your best option to get a clean slate.
Finally, make sure you’ve done your due diligence on other alternatives. Every situation is different, which means there’s no one-size-fits-all solution. Take the time to consult with a credit counselor to determine which option is best.
How to Choose a Credit Counselor
Not all credit counselors are created equal, and choosing the wrong one could leave you worse off than when you started.
Research an Accredited Nonprofit Agency
In general, it’s best to work with a nonprofit credit counseling agency. You can find an accredited nonprofit agency through the National Foundation of Credit Counseling or the Financial Counseling Association of America.
Just because it has nonprofit status, though, it doesn’t mean the service is free. If you find a for-profit or nonprofit agency that charges for information or most of its services, keep searching.
Ask About Services
A reputable credit counseling agency will have no problem sending you free information about the services they provide without requiring information in return. If you’re asked to share personal information or a fee to get an idea of what they offer, that’s a huge red flag.
With legitimate agencies, finding out what services they offer can help you determine whether they’re right for you. If you need help with your student loans, for instance, you’ll want to make sure that service is included.
Know How You’ll Get Help
Credit counselors may offer to meet with you in person, over the phone, or online. You’ll typically get an initial consultation plus follow-up sessions. If you specifically need to meet in a certain way, make sure the agency you’re considering offers that method of communication.
Find Out About Fees
While reputable credit counseling agencies don’t charge for many of their services, you can expect some to cost some money. According to McClary, the fees are always affordable. But you’ll still want to get an idea of what to expect, so you can determine whether it fits within your budget.
How to Make the Most Out of Credit Counseling
If you’re planning to work with a credit counselor, take the opportunity to learn as much as you can. Here are just a few ideas that can help:
- Don’t wait until your situation is desperate to seek help.
- Gather all of your financial information beforehand to ensure you get the best recommendations.
- Set an appointment at a time when you’re not stressed about getting back to work, school, or another obligation.
- Get information about services and fees before you go to get an idea of what you can talk about.
- Write down specific questions before your session to help the counselor know how to best help you.
If you’re planning to get on a debt management plan, make sure you pay on time every month. If you fail to meet the plan’s terms, your creditors may send your accounts to collections, which can damage your credit score and cause more problems in the long run.
The Bottom Line
Credit counseling is a valuable service that can help just about anyone improve their financial well-being. Even if you’re nowhere near suffering financial hardship, it can be worth it to work with a credit counselor to get an idea of how you can improve your money management.
If you’re struggling with debt, a credit counselor can help you find the right solution to your problem. Depending on the situation, that solution may be a debt management plan, which can do directly with the credit counseling agency.
A debt management plan isn’t free, but it can save you time and money as you pay back your creditors.
Regardless of your reason for working with a credit counselor, it’s crucial that you take the time to research different agencies and pick the one that’s best suited to help you. And while some services may cost money, you can generally expect the fees to be fair and affordable.