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Credit counseling is a type of service that helps consumers address their money and debt woes by offering advice and guiding them to useful resources. Typically provided by nonprofit organizations, credit counseling involves a thorough analysis of a person's financial picture, and ends with practical suggestions to resolve the problem.
Although credit counseling is available to anyone who wants professional guidance, it's geared toward people who struggle with credit card bills and are looking for ways to handle them. For this reason, the services credit counseling agencies offer includes debt management plans, which are designed to help people get out of debt quickly and efficiently.
How Does Credit Counseling Work
If you're having difficulty meeting your expenses and are drowning in debt, a credit counseling agency is the place to go. Certified credit counselors are trained in consumer law, budgeting and how to handle all kinds of credit issues. They won't judge you for the decisions you've made in the past, but will help you move forward so you're in a better position in the future.
The first step in the credit counseling process is booking a free, hour-long budget and debt counseling appointment. You can find a credit counseling agency through several organizations: The National Foundation for Credit Counseling and the Financial Counseling Association of America are great places to start. Also, you should consult the U.S. Department of Justice website for a list of approved credit counselors by state.
Once you pick an agency and start the process, you will usually be asked to download and sign the counseling agreement forms, as well as a worksheet to list your income, expenses, assets and liabilities. Most agencies conduct appointments by phone, but some also offer online and in-person sessions.
Your appointment will start with you giving a brief overview of your financial situation and what you hope to gain from the counseling process. With that in mind, your counselor will conduct a thorough review of your worksheet. If more money is going out than coming in, your counselor will work with you to figure out a way to close the gap. Together you will decide which expenses are essential and which can be reduced or even eliminated. Other recommendations may include selling unnecessary assets or increasing your income by getting a new or second job.
Regarding debt, your counselor will explain your rights and responsibilities and provide information on how to handle your creditors. Based on what you expressed at the start of the appointment, your counselor will develop an action plan that directly addresses your goals.
Debt Management Plan
A debt management plan (DMP) may be one of your counselor's suggestions. It's designed for people who can just meet their essential expenses and minimum credit card payments. With a DMP, you send one monthly payment to the credit counseling agency, which then distributes the money to your creditors.
Credit card companies may agree to lower their interest rates for people on a DMP so more of the payment goes to the principal rather than finance charges. If you've fallen behind on payments, your cards' higher penalty interest rates may have kicked in, which could make it more difficult to get out of debt. After one creditor is paid off, the payment remains the same and the rest receive a larger payment until all balances are brought down to zero. With a DMP, you should be able to pay off your debt within three to five years. You can pay it off earlier if your situation improves, or stop any time you want.
Aside from counseling and debt management plans, credit counseling agencies also offer referrals (to charities, nonprofits and government organizations), educational materials and financial workshops. Most provide pre- and post-bankruptcy counseling and credit report reviews. Some are certified by the Department of Housing and Urban Development to conduct housing counseling to first-time homebuyers and to homeowners who want to avoid foreclosure.
Does Credit Counseling Hurt Credit?
Credit counseling itself has no impact on your credit report since it is merely an informational appointment. If you enroll in the DMP, however, your credit scores may be affected.
Some credit card companies notify the credit reporting bureaus that you are paying through a third-party service. The notice is not calculated into your credit scores.
Once you start making payments via the agency, your credit score can improve because you will establish a steady payment pattern. That will likely help your credit scores rise if you've been delinquent in the recent past. In fact, if you were several months behind when you started, the credit card company may re-age the account, which will show that you're now in good standing. Reducing your credit utilization ratio by paying off your credit cards can also have a positive effect on your scores.
Potential problems, however, may lie ahead. If you have to close accounts as part of your DMP, doing so eventually will affect the length of your credit history, which is a credit scoring factor. Then again, if your accounts were closed because you were seriously delinquent, chances are your scores are already low, so this isn't likely to be a major concern.
If you haven't paid late, it will be particularly important to ensure that no payments are missed between the time you begin the DMP and when the agency starts sending the payments.
Should I Use a Credit Counseling Service?
There are plenty of excellent reasons to see a credit counselor. Aside from building a game plan to tackle credit card debt, a credit counseling agency can help you:
- Develop or refine a budget and save money.
- Communicate with lenders and collection agencies.
- Learn about student loan repayment plans.
- Avoid or deal with debt related lawsuits and repossessions.
- Determine if bankruptcy is the right decision.
- Protect or rebuild your credit.
Since there is no charge for the appointments, you've got nothing to lose by spending an hour with a counselor. You'll be under no obligation to follow their action plan, as it will be simply a series of suggestions.
Help Is Out There
When you're experiencing financial troubles, do not hesitate to pursue high-quality services and support. A good counselor can help you identify the best strategy for your unique situation. If you don't know who you owe or what your balances are, obtain a free copy of your Experian credit report through our website or through AnnualCreditReport.com. After reading it, you may decide that credit counseling is what you need to do to get ahead.