Advertiser Disclosure

Pay Down My Debt

How Does Credit Counseling Work?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

credit counseling

Credit counseling is a smart first stop for anyone interested in getting a better handle on their money. It can help you build a budget and improve your credit score, but it’s especially helpful for those struggling with debt.

Credit counseling 101: What you should know

Read on for an overview of credit counseling and when to pursue it.

9 Questions and Answers About Credit Counseling

A certified credit counselor works with you to understand the full picture of your finances and develop a plan. Credit counselors also offer debt management plans.

There are various costs:

  • Initial 1-hour consultation: Should be free

  • Enrollment fee: About $34

  • Monthly fee: About $24

Credit counseling is a good idea when you are:

  • Overwhelmed by debt and unsure how to address it

  • Interested in building a budget but don’t know where to start

  • Considering or have already filed for bankruptcy, at which point it may be required


No

It depends on the type of help you receive from a credit counselor

1 hour to 5 years

No

Eventually, yes

No

What is credit counseling?

Credit counselors provide financial education, such as budgeting advice and housing counseling, and they also help clients implement debt management plans to pay off debt. Debt management plans let those in debt make a single monthly payment to the counselor, who then pays creditors on the client’s behalf.

Credit counselors generally work for nonprofits, and are trained and certified by organizations, such as the National Association of Certified Credit Counselors and the National Foundation for Credit Counseling.

You can receive credit counseling over the phone, online or in person. Depending on your needs, you may speak to a credit counselor just once or twice, or sign up for an ongoing debt management plan. Before working with a credit counselor, ensure they are certified and receive confirmation of any fees in writing.

How much does it cost?

An initial consultation at a reputable credit counseling agency is free and generally lasts for one hour, said Thomas Nitzsche, a credit educator and spokesman at Money Management International, a nonprofit credit counseling organization in the Houston area. During that time, a counselor will review your finances and answer questions about how to manage debt, budget or meet financial goals.

Clients who feel overwhelmed by debt may choose to sign up for a debt management plan, during which you’ll pay the credit counseling agency a fixed amount every month. The agency will then pay your creditors, generally after negotiating lower interest rates or fees on your behalf.

A debt management plan can take up to five years, and you must make payments regularly until the plan is complete. At Money Management International, a debt management plan costs $34 to enroll and $24 a month on average, Nitzsche said. You can expect to pay around that much at other nonprofit credit counseling agencies.

When is it useful?

Most consumers access credit counseling when they’re seeking help to answer questions or overcome financial difficulties. It can be useful in the following situations:

  • When you need help addressing debt. During credit counseling, you can assess the situation, explore debt relief options and start a debt management plan if that’s best for you. About 10% of credit counseling clients at Money Management International choose to enter a debt management plan, Nitzsche said.
  • When you want to budget but don’t know how. It may be overwhelming to create a budget on your own or evaluate which expenses you can cut or negotiate. A credit counselor can examine your finances and offer solutions.
  • When you’re exploring bankruptcy. Whether to file for bankruptcy is a significant decision to make, and a credit counselor can help you compare it with other options. If you do file, you’re required to attend pre-bankruptcy counseling within six months.
  • When you have specific financial questions. Credit counseling agencies may also offer specific types of counseling, for those with questions about homeownership or student loan debt, for instance. If you’re ready to take the next step in these areas but are feeling stuck, credit counselors can steer you in the right direction.

Are there credit requirements?

You do not need a specific credit score to participate in credit counseling. Anyone can get help, whether your credit score is lower than you’d like or your score is strong and you’re exploring the best financial next steps to pursue.

Before agreeing to a debt management plan, some credit card companies or lenders may require proof that you can’t pay the debt unless you participate in the plan, Nitzsche said. They may also want to see that you earn enough money to make payments on the plan as agreed.

Can you continue using your accounts?

If you seek general advice from a credit counselor and follow their suggestions on your own, it’s up to you whether to continue using your accounts.

You’d be wise to discontinue using credit cards when you’re working on eliminating credit card debt, but you do not have to close your accounts. That could result in a lower credit score: You’ll have less available credit, thereby increasing the amount of debt you have relative to your credit limit.

When you sign up for a debt management plan, though, your credit counselor may require you to close credit accounts so that you do not add to your debt. You may decide that’s worth the effect on your credit in exchange for relief from debt. Also, making payments on time during and after the plan will have a positive impact on your score.

How long does it take?

The amount of time you spend working with a credit counselor depends on your needs. You may decide that a one-hour counseling session is enough to come up with a debt payoff plan.

Or, if you feel deeply overwhelmed by debt and opt for debt management, the plan could last up to five years. It could take less time if you can pay extra toward your debt, though, as a result of a pay raise or bonus, for instance. Clients at Money Management International complete their debt management plans in an average of four years, Nitzsche said.

Are there tax implications?

No. Debt settlement, a separate process that involves negotiating with creditors to pay less than you owe, may result in savings that are taxable as income. But when you work with a credit counselor on a debt management plan, you pay the full amount you owe, Nitzsche said — just at more favorable terms, such as at a lower interest rate or over a longer period. That means you do not have to pay tax on settled debt.

Will it affect your credit?

Merely signing up for credit counseling won’t negatively or positively affect your credit. But the outcomes of credit counseling can. Designing a budget that lets you pay bills on time can help protect your credit from the effects of missed payments.

A debt management plan may result in a dip to your score if you close credit accounts, but positive payment history from then on will improve it. On the flip side, a single missed payment to the credit counseling agency while on a debt management plan could put your good standing at risk with multiple creditors.

Is it guaranteed to work?

There is no guarantee that credit counseling will improve your finances. Once you’ve chosen a reputable counselor you trust, the success of the experience largely depends on your commitment to following their guidance. Taking their advice to keep to a budget, or making payments as agreed on a debt management plan, requires diligence and organization. But you’ll likely have a better shot at reaching your goals with a credit counselor in your corner than on your own.

Credit counseling isn’t your only option

You may decide to choose a more do-it-yourself version of debt relief. You can look into debt consolidation, which generally comes in two forms: interest-free balance transfer credit cards to get credit card debt under control, and personal loans.

Or you may try to bring the debt down on your own: You can call your creditors and ask if they’ll offer you a lower interest rate, for example, or waive late fees.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brianna McGurran |

Brianna McGurran is a writer at MagnifyMoney. You can email Brianna here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Pay Down My Debt

A Procrastinator’s Guide to Managing Your Finances

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

iStock

Many of us fall victim to procrastination from time to time. And when it comes to managing your finances, avoiding or delaying tasks can get expensive very quickly.

“Our lives are busy, and sometimes we don’t want to deal with it,” says Gerri Detweiler, education director at the business credit management website Nav and author of “Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

In fact, Detweiler remembers the price she paid the year she pushed off renewing her business filings with the state.

“I didn’t get it done right away and paid enormously for it,” she said.

No matter the reason behind your procrastination, it can lead to a financial mess unless you move it to the forefront of your to-do list. Know that it is possible to transform into a doer – even if you’re a habitual procrastinator – by adopting the small changes below to achieve big results down the line.

1. Automate as much as possible

If you’re prone to procrastination, keeping on top of payments can feel overwhelming, especially if you have multiple lenders you need to pay every month. Consider automating your payments so you can avoid late fees and charges. Detweiler advises setting up text or email alerts so you know when payments are due and if there are any changes to the minimum payment amount. You can set up automatic payments with either the lender or through your bank’s bill pay tool; all you have to do is just make sure you have enough money in your account to cover what you owe.

2. Consolidate debt so you have fewer bills to keep track of

The average person has 3.06 bank cards and 2.5 retail cards, according to Experian’s 2018 State of Credit Report. Detweiler advises keeping two credit cards active at any given time: one with a lower interest rate to use for bigger purchases where you can revolve a balance, and a second credit card that is used for everything else, including earning rewards, that you pay off in full at the end of month. Then, put the rest of your cards in a drawer once they’re paid off and use them only occasionally to keep the accounts from being closed by the issuer.

If you have multiple high-interest credit card balances, you may be able to qualify for a balance transfer card offering 0% interest for a specific period of time. While most balance transfer deals charge a 3% balance transfer fee, which is added to the amount you transfer, it may make financial sense to move multiple balances to one card with one payment. Then, devise a repayment plan to knock down that balance as much as possible during the no-interest period as your payments will all be directed toward the principal until the 0% offer has expired.

Another option is to consolidate multiple card balances or other debts with a debt consolidation loan. Depending on how good your credit score is, you may be able to find a lender offering an interest rate lower than what you’re paying on your credit cards. The beauty of a debt consolidation loan is that you can use it to pay off your debts and then have one fixed payment over a specific period of time, generally two to five years. Of course, this will only help if you have the discipline to refrain from adding new debts or purchases to your now-cleared credit cards.

If you’re really struggling and over your head with your finances, consider talking to a credit counselor that can put you on a debt management plan.

3. Turn to technology to help change behavior

If you’re a procrastinator, relying on your willpower can be challenging. Thankfully, technology can help with that. Consider turning to apps or websites to help change any unhealthy behaviors and transform any bad habits.

For instance, you could download a robo-saving app, such as Digit, or enroll in a savings program like Bank of America’s Keep the Change, that help make saving as painless and out-of-mind as possible. Remember that small financial goals (like saving $5 per day versus $150 per month) will seem more achievable and can help lead to big improvements.

Other apps or websites aggregate information about multiple accounts, so you can see what’s due and what’s outstanding on a weekly or monthly basis, can also come in handy. Detweiler suggests Mint, Credit Karma, or the EveryDollar budget app. She also suggests setting reminders so you can remember to log in regularly. When you see the progress you’ve made in a chart or graph, it acts like a reward that is sent to your brain, which is key to long-lasting behavior changes, as journalist Charles Duhigg noted in his book “The Power of Habit.”

Whether your procrastination is the result of being really bad at time management or overly demanding standards that result in unhealthy levels of perfectionism, it helps to be aware of what’s causing any counterproductive, irrational behavior so you can determine how to do better.

For instance, if you’re really bad at estimating how long it’ll take you to finish a task, then make a habit of starting earlier than you normally would. Or, if your overly demanding standards stop you from getting started, then remind yourself before you start the task that “done” is better than perfect and think back to times that procrastination has proven harmful to you.

Changing behaviors, like managing your time better or reducing any anxiety you feel when tackling big tasks (like paying multiple lenders every month), can be challenging, but not impossible. Breaking things down into small, simpler tasks and using technology to help you as much as possible can set you on a fresh path to break unhealthy habits and lead to big improvements on your finances.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Vivian Giang
Vivian Giang |

Vivian Giang is a writer at MagnifyMoney. You can email Vivian here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Pay Down My Debt

Got Tax Debt? Here’s What to Do

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Some people are fearful of the IRS. But if you are someone who owes tax debt to the IRS, you need more than a little bit of healthy fear to get you through — you need a plan. Here’s what you can do to pay off tax debt.

7 steps to pay off tax debt

Make an initial payment.

If you can’t pay your tax bill, one strategy — according to the IRS — is to make an initial payment based on how much you can afford, then work to determine a plan for paying down the rest of your debt.

Determine how much you can pay.

When faced with what seems like a staggering tax bill, don’t panic. The important thing is that you don’t ignore the IRS. One of your first steps should be to determine how much of your tax bill you can afford to pay. And keep in mind that whatever you don’t pay will be subject to accruing interest and penalty fees.

Choose a payment option.

Once you have settled on how much of a payment you can make, you have to make that payment. These are the main options for payments: using the electronic federal tax payment system, which is free, but is most suitable for businesses or large payments and requires enrollment; electronic funds withdrawal (which can be done during e-filing) straight from your bank account or from the IRS mobile app, same-day wiring (which may carry bank fees), a check or money order, or cash at a retail partner.

Ask for an installment agreement.

If you know you can’t make your payment in full, you can apply online for a payment plan through the IRS. Your eligibility for a payment option will depend on your individual tax situation.

To apply for an installment agreement, you have to fill out an application online that will include information such as your Social Security number, your most recent tax return filing date and your basic personal information. There are three options for a payment plan: a full payment, a short-term payment plan that will require paying in less than 120 days and a long-term installment agreement to pay over more than 120 days. In general, you are eligible to apply online for the installment agreement if you owe $50,000 or less in combined tax, penalties and interest fees and you have filed all your tax returns. The Federal Trade Commission also notes that the IRS usually can’t deny an installment agreement if you owe less than $10,000.

Ask for an offer in compromise.

Contrary to what you may think, the IRS is willing to work with you if you have tax debt and can’t pay what you owe. According to the IRS, it will consider what it calls an offer in compromise if you can’t pay your bills — and if doing so will cause a financial hardship to you.

An offer in compromise is something that can be considered after you have exhausted other options. It is based on several factors that the IRS will assess, including:

  • Your ability to pay
  • Your current income
  • Your total debt and expense obligation
  • Your assets and equity

If you can put together a reasonable offer in compromise, the IRS notes that it is generally able to accept the offer if it represents the most it can expect to collect within a “reasonable amount of time.”

There are some qualifications that you have to meet to be considered for an offer in compromise, which is detailed on the IRS website. When you submit your offer, you will have to choose one of two payment options to show the IRS your offer is serious: a lump sum or a periodic payment. The lump-sum offer consists of you including 20% of the total offer amount. If the IRS takes your offer, it will keep that 20% payment and you will pay the rest in up to five payments. If you go the periodic payment route, you’ll still submit an initial payment with your offer application, but you’ll make monthly installments while you wait to hear back from the IRS. If it does accept your application, you’ll pay monthly until your offer is paid off.

In some cases, if you meet certain low-income qualifications, your application fee, initial payment and monthly installments will be waived while your offer is considered. While the IRS considers your offer, you are required to make any associated payments with your offer, and any other collection activities will be suspended. If you don’t hear back from the IRS within two years of your offer, it is considered accepted.

Ask for “Currently Not Collectible” status.

Depending on your financial state, the IRS may determine that your account is not collectible at the moment and temporarily pause collection until your status changes. To be eligible for the status, you may have to complete a Collection Information Statement and submit proof of your finances, such as your monthly income and assets. Even if the IRS determines that you are in a not-collectible status, your debt will still be susceptible to penalties and interests until the full amount is paid. To request a delay in the collection process, you have to call the IRS.

Work with a professional.

Although it might seem counterproductive, it may be helpful to hire a tax professional who can help you sort through your options and make a plan. The IRS recommends that if you choose to work with a tax professional, you make sure you vet their credentials. There are certain rules pertaining to debt collection, and you always have the right to work directly with the IRS instead of a debt collector.

What you should know about tax debt

Tax debt can occur in large or small amounts. Essentially, as soon as you fail to pay what you owe the IRS, you have tax debt. Here’s what you should know about tax debt.

IRS collection practices. The official collection practice for tax debt begins after you have received your tax bill from the IRS and failed to make your payment in full. After you receive your first tax bill, the IRS will send you one more bill before enacting collection actions. But, in the meantime, the amount you owe will continue to accrue interest and possible penalties.

Once the IRS has sent your final tax bill, it will move to collection actions, which can range from using any future tax refunds to seizing your property and assets or showing up at your home or business.

Statute of limitations. In general, the statute of limitations on a tax liability for the IRS is 10 years. After the statute of limitations expires, the government no longer has the right to pursue collecting that liability.

Always file your taxes. One of the best ways to be proactive against tax debt is to make sure that you always file your taxes by the IRS deadline and work to make any type of payment that you can. Delaying, either with filing or with debt, never pays off. It’s always best to work with a tax professional to file your return to make sure that you reduce your chance of an error.

Don’t ignore notices from the IRS. As tempting as it may be to think that ignoring notices from the IRS will make them forget about any debt you owe, it doesn’t exactly work that way. In fact, the longer the IRS doesn’t hear from you or is unable to reach you, the more it may increase its efforts. For instance, the IRS could turn to seizing property, your bank account and your possessions, or issuing you a summons.

The bottom line

If you find yourself in a situation where you have tax debt, you have options. You can work directly with the IRS and submit details of your financial status to come up with some sort of payment plan or even temporary deferment depending on your specific situation.

The most important thing you can do is communicate with the IRS and take steps to show it you are serious about making some form of payment.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Chaunie Brusie
Chaunie Brusie |

Chaunie Brusie is a writer at MagnifyMoney. You can email Chaunie here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score