Many who are deep in debt struggle to find answers to their financial questions:
- “How do I manage my money in the future?”
- “What should I do to improve my credit?”
- “Is bankruptcy my only option?”
- “Are there more resources out there that can lessen my financial burdens?”
Your debt relief options include speaking with a credit counselor, who can provide you with financial insight and recommendations on how to proceed with paying back your debts. We’ll break down the basics so you can choose what’s best for you.
What is Credit Counseling?
Credit counseling is an educational program that aims to help consumers who need help managing their finances. Similarly to how you would visit an academic advisor for educational guidance or a counseling service for mental health needs, a credit counselor uses their expertise to help their clients improve their finances.
The ultimate goal of credit counseling is to provide individuals with advice and resources on how to gain control over their finances. A credit counselor can help you review your current financial situation, discuss any concerns, and implement strategies to achieve your money goals. Credit counselors use a variety of tactics to help their clients, including budgeting tools, debt counseling and sometimes debt management plans.
Different Types of Credit Counseling Services
Not all credit counseling services are alike. Most fall under these two categories:
Debt Management-Focused Credit Counseling
While consumers may seek credit counseling to help with other personal finance needs, like retirement planning and budgeting assistance, many use these services to help primarily with debt.
Credit counselors can be found at financial institutions, housing authorities, military bases and universities. While the FTC advises consumers to look for “non-profit” credit counseling services, they note that some with non-profit status may charge high hidden fees or urge clients to make “voluntary” contributions, which could lead to more debt. Avoid falling into any scams and research thoroughly when choosing a credit counseling service to work with.
Pre-Bankruptcy Credit Counseling
Federal law requires those who plan to pursue bankruptcy to receive credit counseling before filing. This requirement is meant to act as a last-ditch effort to see if other options outside of bankruptcy are better suited for the filer, but it’s not always helpful for those who have already explored their options and chosen bankruptcy as their last resort. The American Bankruptcy Institute has even recommended that this requirement be removed from the bankruptcy process. Until official changes are made, however, filers should be prepared to participate in a pre-bankruptcy counseling session from a government-approved agency within 180 days of filing.
Credit Counseling FAQ
What Should I Bring to My Credit Counseling Session?
In addition to the materials your counselor asks for, it’s best to also have paper copies of the following documents:
- Your budget or a current list of your estimated monthly expenses, including utilities, housing payments, insurance payments and grocery expenses
- Pay stubs and any other documentation that illustrates your monthly income
- Credit card statements
- Loan terms, monthly payments and interest rates
What Happens in a Credit Counseling Session?
Credit counseling sessions can occur in-person, online or over the phone. First-time sessions are typically 30-60 minutes long. Credit counselors may charge a one-time fee, but low-income individuals usually qualify for free or reduced counseling.
Your counselor will likely begin by asking about your personal finances and reviewing the documentation you’ve provided them with. After they get a clear picture of your current situation, they will help you create an actionable plan to reach your monetary goals.
If your finances seem to be in a fairly healthy place, a one-time session may be all you need. However, if your personal finances are a bit more complicated, it’s best to work with a counselor who can visit with you on a long-term basis.
Can Credit Counselors Do More Than Offer Advice?
Your credit counselor may recommend enrolling in a debt management program (DMP). This is an agreement where you’ll make monthly lump sum payments to the credit counseling agency. In turn, they will communicate with your creditors directly, work to negotiate new payment plans and reduce your interest rates, and use the funds you send them to pay down your debts on your behalf. DMPs typically last 3-5 years, are limited to unsecured debt, and may require the participant to stop using all lines of credit while in the program.
What Are the Pros and Cons of Credit Counseling?
Credit counseling can be helpful for those who are looking for a little extra guidance. If you’re just beginning to struggle with debt payments, a credit counseling session can provide you with budgeting guidance and the tools you need to prevent a smaller debt situation from getting out of hand.
One of the biggest downsides to credit counseling is that it cannot lower the total amount of debt you have. Debt management programs may lead to lower interest rates and a better payment schedule, but they can’t reduce your principal balance like a debt settlement program can.
Pros of Credit Counseling
- Can provide general financial guidance and tools to improve financial health
- Provides clear, actionable plans for debt repayment
- Can consolidate payments and lower interest rates through a DMP
Cons of Credit Counseling
- Is less helpful if your debt situation is already dire
- Can’t lower your principal balances
- May require recurring sessions
- May charge setup fee
How Do I Find a Credit Counseling Agency?
There are a variety of credit counseling programs to choose from, including those offered through the following:
- Credit Unions
- Military Bases
- Consumer Protection Agencies
When researching your credit counseling options, it’s important to work with a trusted group. Look for credit counselors who are members of the American Fair Credit Council (AFCC) or the National Foundation for Credit Counseling (NFCC), as they adhere to strict standards and regular audits. You should also check to see that your credit counselor is in good standing with the Better Business Bureau.
Reputable credit counselors will be transparent with their costs, so it’s wise to avoid organizations that charge you an upfront fee before providing you with any information. Credit counselors should also be willing to work with you no matter the size of your debt.
Are Consumer Credit Counseling Services Right for Me?
Credit counseling isn’t restricted to those who are already drowning in debt; if you are interested in planning ahead for financial success, a credit counselor can provide you with more information and answer any financial questions you may have. Whether you’ve just received your first credit card, want some budgeting guidance, are just beginning to struggle with card payments or are handling more debt than you can manage, credit counselors can assist you and point you in the right direction.
It’s important to remember that although credit counseling services can work with creditors to reduce your monthly payments, they can’t reduce the total amount of debt that you owe. If you’re looking for ways to negotiate with creditors and reduce your overall debt, you may instead seek help from a debt settlement company.
Accredited Debt Relief provides debt settlement options to individuals throughout the U.S., and is often able to reduce the total amount of debt our clients owe, which helps them pay off their debts quicker. Contact us to learn more and receive your free, no obligation consultation.