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Roughly 6 in 10 consumers find it difficult to minimize their debt due to unexpected financial emergencies or reduction of income, according to a Harris Poll survey conducted by the National Foundation for Credit Counseling. Relatedly, more U.S. adults carried a credit card balance from month to month in 2020 compared with 2019, and 27% admitted they did not pay all of their bills on time. If your debt feels oppressive—or, worse, overwhelming—a nonprofit credit counseling agency may be able to offer advice and support for free.
A certified counselor can train an objective eye on your finances, help you formulate a strategy for coping with debt and other financial challenges, and even offer a plan that can help put your finances on the right track. Nonprofit debt counseling costs can vary from state to state but are meant to be affordable to people who need this service—and may even be free if you qualify for financial help.
What Is Debt Counseling?
Debt counseling—also known as credit counseling—involves meeting with a trained counselor who will evaluate your financial situation and find possible solutions for your issues with debt. The process begins with a 30- to 60-minute counseling session that involves going over information about your income, expenses, savings and what you owe. The counselor will offer insights and suggest alternatives for paying down your outstanding balances. In many cases, this preliminary counseling session is free.
One of the options a credit counselor may suggest is debt management plan (DMP). Here, the counseling agency works with your creditors to reduce your interest rates and may be able to extend your payment timeframe. They roll all of your monthly debts into a single payment you make to the debt counseling service, which will then pay your creditors.
Having a debt counseling agency make payments on your behalf does a few things. For one, it simplifies your monthly payments so you're less likely to forget making a payment on time. You also know exactly how much money you need to cover all of your debts for the month. The goal is typically to pay off your debt in three to five years, which gives you a light at the end of the tunnel.
A DMP is not to be confused with debt settlement. Debt settlement involves a paid representative attempting to negotiate with your creditors to reduce the amount of debt you will repay. While this may offer you some relief, it also can hurt your credit in several ways. Settled accounts appear as negative information on your credit report, and the settlement process may require you to stop making payments toward your debt, which will then be counted as late. Debt settlement can be costly as well. If you're contemplating this strategy, make sure the cost of settlement plus the damage to your credit score and report don't outweigh the money you'll save by settling your debt for less than what was originally owed.
Is Debt Counseling Expensive?
Nonprofit debt counseling agencies are created to serve the public interest by educating people about personal finance. To that end, their services are meant to be affordable and many of their services are free. When these agencies do charge, their fees are intended to cover their expenses—and not to turn a profit.
With many nonprofit credit counseling services, the initial consultation is free. If a credit counselor suggests a DMP and you agree to move forward, you may be asked to pay a setup fee and an ongoing monthly charge. Limits on these fees can vary by state. In California, for example, DMP fees may not exceed 8% of the amount paid to creditors or $35, whichever is less. California also allows for a $50 (maximum) education and counseling fee. Nationwide, DMP fees are capped at $79.
Be wary of a counseling service that is for-profit or asks for hundreds or thousands of dollars upfront. Debt counseling should help improve your financial outlook, not send you further into debt. "Get a specific price quote in writing," the Consumer Finance Protection Bureau advises. "If an organization won't help you because you can't afford to pay, look elsewhere."
Even if a DMP requires a modest setup charge and monthly fees, it should help you reduce your interest costs and make your payments more manageable. If you're presented with a plan that doesn't accomplish these goals, think twice about its usefulness.
How to Get a Debt Counselor
Finding the right debt counselor is key. Steer clear of any for-profit credit counseling agencies, and be sure to do your due diligence in other regards as well.
The National Foundation for Credit Counseling refers consumers through its network of member agencies nationwide. Foundation-certified counselors adhere to professional and training standards and are committed to providing affordable services to credit-challenged consumers. The Financial Counseling Association of America also offers referrals. Its members agree to the association's standards and best practices, which includes adhering to IRS rules regarding nonprofit credit counseling agencies.
The U.S. Department of Justice maintains a list of approved credit counseling agencies. You can visit the Justice Department website to search by state or judicial district. You can also check with your state attorney general's office to learn more about credit counseling regulations in your state and look for a list of approved agencies.
Alternatives to Debt Counseling
If you aren't ready to commit to debt counseling, you can also consider do-it-yourself options for paying off credit card debt. Two popular approaches to dealing with debt are the avalanche and the snowball:
- Avalanche strategy: Budget as much money as possible each month to use toward paying down credit card debt. Then, make minimum payments on all of your cards except the one with the highest interest rate; use all of your remaining credit card payment money to pay down the card with the highest interest rate. Continue with this strategy until the highest-interest card is entirely paid off, then pay down the next-highest-interest card the same way.
- Snowball strategy: This strategy is similar to the avalanche, but instead of starting with your highest-interest card, start with the card that has the smallest balance. When it's paid off, take aim at the card with the next smallest balance and continue until all of your cards are paid off.
Another alternative to credit counseling is a debt consolidation loan. This is essentially an unsecured personal loan you use to pay off your credit card balances. You'll still carry debt, but usually at a lower interest rate than your cards charge. Debt consolidation loans also provide structure: You pay the same amount monthly for a set period of time—typically three to five years—and then you're done with your debt. Personal loans are available for borrowers with a range of credit scores, but you'll have better luck finding a favorable interest rate and terms if you have good credit. Use Experian CreditMatch™ to learn more about debt consolidation loans and see a list of loans personalized to your credit score.
Taking Charge of Your Finances
As you go, monitoring your credit score and report can help you track your progress as you pay down debt and, hopefully, improve your credit. Taking on your challenges with debt isn't a fast fix. But getting objective help and guidance from a trained debt counselor can be a productive step toward finally taking charge of your finances.