What Is Credit Counseling?
Credit counseling, sometimes called debt counseling, is a 20-40 minute process in which a certified counselor gathers information about a consumer’s financial situation and provides a personalized debt relief solution. Nonprofit agencies offer the counseling service free – either online, over-the-phone or in person.
During a counseling session you’ll be provided the following:
- Budget Review – A counselor helps you create a budget that includes personalized suggestions on cutting expenses and increasing income in each major budget category.
- Debt Analysis – An analysis of the portion of your credit report listing the credit card accounts, balances, and minimum monthly payments for each.
- Recommendations – An action plan with recommended debt solutions, and alternatives available to you.
The action plan is only a suggestion. The goal of credit counseling is to give you an understanding of your financial situation and empower you to take action – if needed. The approach has proven to be a successful one.
A recent study on credit counseling by researchers at Ohio State University found that those who received credit counseling reduced credit card debt by nearly $6,000 in the first 18 months. That’s compared to a $3,600 reduction by those who did not receive counseling. About 70% of the 12,000 participants said credit counseling improved their financial confidence.
“People in a crisis situation are looking for partners they can trust and that’s what a good credit counseling agency should provide,” Rebecca Steele, CEO of the National Foundation for Credit Counseling said. “We are going to spend time with the consumer going over their income, the stability of their income, understanding their budget needs and teaching them how to save money for those rainy-day situations. That’s the real value of a credit counseling agency.”
Credit Counseling Services
Nonprofit agencies offer additional services to debt counseling, but credit counseling starts with the question-and-answer session. Depending on the counselor’s recommendation, you might also take advantage of a debt management plan, bankruptcy counseling, housing education courses or a student loan review.
This is the initial credit counseling session in which a certified credit counselor collects information about your income, assets and expenses. They will then pull a copy of your credit report and review your debts with you. Counselors make recommendations for how to reduce expenses to help you pay off your debt faster. They may recommend a debt management program or bankruptcy, based on your income, assets and debts. Read more about what happens during a credit counseling session.
Debt Management Plan
If you have enough income to handle your debt, a counselor may recommend a debt management plan (DMP). A DMP combines your debts into one monthly payment with a lower interest rate. The program typically takes 3-5 years to eliminate credit card debts. Agencies do charge a fee for this service. If you qualify for and decide to enroll in the InCharge debt management program, there is a one-time, set-up fee not to exceed $75, and a monthly fee averaging $32, depending on your state and debt amount. Learn more about DMP fees.
Pre-file bankruptcy counseling and pre-discharge bankruptcy counseling are both required for an individual going through bankruptcy. Each education course can be completed online or over the phone with a credit counselor. You will receive a certificate of completion that needs to be provided to the court before debts are discharged.
Housing Education & Counseling
Credit counselors can provide housing counseling such as pre-purchase counseling and foreclosure prevention counseling as well as homebuyer education. Many lenders and government assistance programs require a certificate of completion from a homebuyer education course as a condition of the mortgage. These courses teach consumers about budgeting, finding a mortgage, paying taxes, home inspections and other necessary lessons in the home-buying experience. The classes are offered by nonprofit organizations approved by the U.S. Department of Housing and Urban Development (HUD).
Student Loan Counseling
The federal government has eight student loan repayment plans, all with different benefits and eligibility requirements. With student loan counseling, you can get a customized report of your federal student loan repayment options by providing information to a certified counselor. The information is analyzed using a logic engine, which then identifies qualified repayment options – including potential discharges, repayment plans and rehabilitation.
How to Choose the Right Credit Counseling Agency
The Federal Trade Commission recommends contacting nonprofit credit counseling companies, like InCharge Debt Solutions, for online credit counseling, over-the-phone or in-person counseling.
Most nonprofits agencies offer credit counseling for free, however, the FTC website warns that nonprofit status does not guarantee the services are free and suggests careful research before choosing a credit counseling company.
5 Characteristics of a Reputable Credit Counseling Company
- Nonprofit: Check the company’s “About Us” section on its website to make sure it is a registered 501(c)(3) nonprofit organization.
- Licensed and Accredited: Be sure the organization is accredited by the Council On Accreditation (COA) before signing up for their program. The COA determines the standards by which the credit counseling industry follows.
- Certified Counselors: Counselors should be certified, preferably by the National Foundation for Credit Counseling (NFCC). The NFCC requires member organizations to adhere to strict guidelines and regular audits for data security, counselor certification and results-oriented customer service.
- Low Complaints: Contact the state attorney general or Better Business Bureau for records of complaints and how the agency responded to them.
- Free Education: Choose an agency that provides free financial literacy education to clients and the general public.
For-Profit vs. Non-Profit Credit Counseling Services
The NFCC, which certifies credit counselors has approved 57 nonprofit agencies. No for-profit companies are accredited by the NFCC.
“Providing free credit counseling is our obligation as a nonprofit,” Steele said. “We have the consumers best interests at heart, and our counselors are trained and understand social work.”
In other words, it’s not all about the money. Nonprofits agencies are there to serve the consumer. For-profit companies are there to make a buck.
Credit counselors at nonprofit credit counseling agencies operate under strict state and organizational guidelines designed to insure they act in their clients’ best interests. Nonprofits are frequently audited by states to insure they comply with all of that state’s regulations, and they must demonstrate that they are acting in the best interests of all of their clients.
For example, InCharge offers clients monthly newsletters with money-saving tips and stories of people who have gotten out of debt to help motivate clients to do the same.