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:
Credit counseling is a good idea when you are:
It depends on the type of help you receive from a credit counselor
1 hour to 5 years
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.