What Is Credit Card Debt Counseling?

What Is Credit Card Debt Counseling? article image.

Using credit cards can be a great way to build credit and earn rewards or cash back on your purchases. But if you've run up high card balances and are struggling to pay your bills, you may need some help to get back on track. Credit card debt counseling could help you get your credit card debt under control.

Approximately 95% of all adults have a credit card, and while credit cards are the most popular form of borrowing, they also come with some of the highest interest rates. When credit card debt gets out of control, turning to a credit counselor can be a wise choice. Here's what you need to know.

How Does Credit Card Debt Counseling Work?

Debt counseling, also called credit counseling, involves working with a professional to help you manage your debt. Certified credit counselors, financial advocates affiliated with nonprofit agencies such as the National Foundation for Credit Counselors, can help you get a better understanding of your debt and help you devise a plan to pay it off.

When you meet with a credit counselor, they'll take the time to understand your finances and unsecured debt obligations. If you are struggling with credit card debt specifically, they will see how much you owe across how many accounts and will help you craft a repayment plan.

In cases of severe debt, a credit counselor may suggest a debt management plan (DMP), which outlines specifically how your debt will be paid off. As part of a DMP, you'll make one monthly payment to the credit counseling agency, which in turn will pay your creditors on your behalf. They will often negotiate repayment with your lenders, who may lower your interest rates. You'll usually pay a small upfront fee and ongoing monthly fee for the service, and you'll likely be required to close the accounts that are part of the plan.

Though they may sound similar, a debt management plan is different from a debt settlement program. Debt settlement programs "settle" your debt for less than what you owe, and often require you to stop making payments on your accounts. Doing so can have a significant negative effect on your credit. Debt settlement is a last-resort option if bankruptcy is your only other avenue.

Is Credit Card Debt Counseling a Good Idea?

If it becomes hard to manage your credit card debt on your own, credit counseling can be a great option to help you get back on track. Even if you feel you're simply spending too much and want to get some professional financial advice, a credit counseling session might do you some good.

Falling behind on debt not only has implications for your credit, but paying interest for an extended period can be quite costly. Working with a credit counselor may help you pay down your debt more efficiently and possibly even save you some money.

Though credit counseling can be a critical lifeline if you're struggling with debt, there are a few things to remember:

  • Some aspects of credit counseling sessions may cost money. If you opt to work with your credit counselor on a debt management plan, you'll pay around $30 to $50 to set it up, and $25 to $75 per month for the duration of the plan. If you have a multi-year plan, the monthly costs could add up. When you're researching credit counselors, ask them if there are any fees associated with their services, including the costs that come with a debt management plan.
  • Credit counseling is not a cure-all solution. Though credit counseling can be helpful, it's not a magic bullet for all your financial woes. As you work to manage your finances, it's important to focus on building responsible habits for the future so you don't find yourself in a similar situation. Though credit counseling may help you get out of debt, it will ultimately be on you to stay out of debt moving forward.

How Does Credit Card Debt Counseling Affect Your Credit?

Credit card debt counseling will not directly impact your credit scores. That said, there are a few ways that working with a credit counselor could indirectly impact your credit:

  • If you enroll in a debt management plan, your accounts may be closed as part of the plan. This could lower the average length of your credit history, which could impact your score. If your credit counselor renegotiates any terms with your lenders, this change could also be reflected in your credit reports, causing your score to go down.
  • Any progress you make toward paying down your debt should help improve your credit standing in the long run.

Alternatives to Credit Card Debt Counseling

Credit counseling is not for everyone. If you feel you can manage your credit card debt on your own—there are plenty of things you can do to take action now. Getting out of debt won't be easy, but if you develop a good plan and stick to it, you could start to see things improve in a matter of months.

Here are a few strategies to consider as you work toward getting out of credit card debt:

  • Research debt repayment strategies. When attacking a large amount of debt, your strategy will make a difference. With the debt avalanche method, you'll make the minimum payments on all your cards, but put extra toward the credit card with the highest interest rate first. Once that card is paid off, apply the same strategy to the card with the next-highest rate until all your cards are paid off. With the debt snowball approach, you'll pay extra toward the account with the smallest balance first, and then apply that extra payment amount to the card with the next-smallest balance until all your accounts are paid off. Typically, you'll pay less in interest using debt avalanche, but you'll realize quicker wins (paid-off accounts) with debt snowball.
  • Consider a debt consolidation loan. One way to ease the process of paying down debt is by consolidating all or some of your balances into one larger loan. Doing this can save you money on interest and can help simplify the repayment process.
  • Hold yourself accountable. The most important part of any debt repayment strategy is sticking to it. Once you start, do everything you can to continue your repayment as planned. It's easy to get off track, but sticking with your plan will help you get out of debt within the time you set out.

As you work to pay down your debt—whether you're doing it on your own or with a credit counselor—regularly checking your credit reports and scores can help keep you on track. Experian credit monitoring can also help you track your progress, and provides alerts when there are any changes to your credit report.

How Good Is Your Credit Score?

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