How to Know Whether You Need a Credit Counselor

If you're in debt and are struggling to keep up with your payments, you may benefit from enlisting the help of a credit counselor.

Credit counseling agencies typically are nonprofit organizations that provide some free services, as well as debt management plans, to help people eliminate unsecured debt. Here's what to consider before you decide to work with a credit counselor.

What Does a Credit Counselor Do?

Credit counseling agencies provide several services to help people get out of debt and improve their money management skills. Counselors are trained and certified to help you improve your overall financial literacy, and can show you how to create a budget, get a copy of your credit reports and interpret your credit scores. Some also provide counseling on housing or bankruptcy.

In addition to one-on-one services, credit counselors may also offer group workshops, where you can learn and get access to free resources.

If you need more hands-on assistance, credit counselors can also work with you to create a debt management plan.

Unlike debt settlement, which uses risky strategies to try to settle for less than you owe, a debt management plan focuses on reducing your monthly payments. Credit counselors do this by negotiating lower interest rates, reduced or waived fees, longer repayment terms and more with your creditors.

Instead of continuing to pay your creditors individually, you make one lump-sum payment to the credit counseling agency, which divvies it up and makes payments on your behalf. Debt management plans typically last three to five years.

Is Credit Counseling Right for Me?

If you're thinking about working with a credit counselor, it's important to understand both the benefits and drawbacks and how they relate to your situation.

Pros of Credit Counseling

Whether you're thinking of using a debt management plan or you just want advice on how to better manage your money, here's how credit counseling can help you:

  • The advice is free. While debt management plans do require upfront and monthly fees, you can attend workshops or get one-on-one financial advice for free. So if you just want to improve your money management, it may be worth having a credit counselor take a look at your situation.
  • It could reduce your debt-related costs. A credit counselor may be able to negotiate lower interest rates, reduced or waived fees, and even a longer repayment term to help make your monthly payments more affordable and save you money in the long run.
  • It can simplify your debt payoff plan. With a debt management plan, you pay just one monthly payment to the credit counseling agency instead of continuing to pay each creditor individually. Also, if you're incorporating collection accounts into your plan, it will end the stressful collection letters and calls when the credit counselor takes over.

Cons of Credit Counseling

While working with a credit counselor has some clear benefits, it may not be the best approach for every situation, especially in regard to debt management plans.

  • It can affect your credit score. Getting on a debt management plan doesn't affect your credit score directly. But credit counselors typically require you to close your credit card accounts at the beginning of the plan. Doing so eliminates available credit and can increase your overall credit utilization ratio, which measures how much of your available credit you're using. A high ratio can adversely affect your credit score.
  • Debt management plans aren't free. The typical initial setup fee can be as high as $50 with monthly fees of around $25, according to the National Foundation for Credit Counseling (NFCC). While that may feel like a small price to pay for debt relief, it's still something to consider with your budget because debt management plans typically last three to five years. That said, credit counselors may be willing to waive their fees if you're experiencing severe financial hardship.
  • Not all debts are includable. Debt management plans are designed to help you pay off unsecured debt like credit cards, personal loans, medical debt and collection accounts. If you're struggling with your auto loan, mortgage or home equity loan, a credit counselor can give you advice but can't work with your creditors. Also, student loans are typically excluded.

Who Can Benefit From Credit Counseling?

Credit counseling is best suited for someone who either needs some free financial advice or is struggling to manage unsecured debt.

Keep in mind, though, that there are some limitations to what a credit counseling agency can help you do. If you're struggling with secured debt, you want to settle for less than what you owe or your financial situation is dire, you may want to cautiously consider other options, such as debt settlement or even bankruptcy.

If you're not sure which path to take, a credit counselor can help you find the right fit based on your situation.

How to Find a Good Credit Counselor

There are several organizations that offer credit counseling, but not all of them are created equal, so it's important to know how to find a good one. The best credit counseling agencies are nonprofit organizations accredited or certified by the NFCC or Financial Counseling Association of America (FCAA).

You can find a list of reputable organizations in your area through the U.S. Department of Justice website or your state's attorney general.

Take your time and pick a few credit counselors to compare. Ask each one about their certifications and set up a preliminary meeting in person or over the phone. This initial meeting should be free, allowing you to share your situation and pick the right counselor for you based on how they respond.

As you go through this process, here are some potential red flags that you should avoid:

  • An organization pushes a debt management plan without spending time analyzing your situation.
  • A credit counselor charges for general financial advice.
  • The agency isn't a nonprofit organization or certified by the NFCC or FCAA.
  • The agency has a minimum debt requirement.

Keep an Eye on Your Credit Score While Working With a Credit Counselor

Credit counseling services are supposed to help you improve your credit and overall financial situation. So if you end up working with a credit counselor, regularly check your credit score to keep track of your progress.

Watch out for any unexplained drops during the process. If you're on a debt management plan, closing credit card accounts can cause your credit utilization rate to spike, which can hurt your credit score. But if you notice any other sudden decreases, check your credit report to make sure your payments are being made on time and there's no fraudulent activity.

As you work with a reputable credit counselor and keep an eye on your credit score and reports, you'll be well on your way to a better financial life.