What Is Credit Counseling?
Credit counseling is a free service that provides help with budgeting, solutions for becoming debt free and tips to successfully manage your money.
Credit counseling is offered by nonprofit agencies and is sometimes called debt counseling. It involves a 30-minute interview with a certified counselor who gathers information about your financial situation and needs to develop a plan that helps you regain control of your finances.
The plan may include a debt management program that nonprofit agencies like InCharge Debt Solutions offer to pay off credit card debt. The credit counseling also includes a look at your credit report to verify all debts. You could receive educational materials that can improve your understanding of how to manage your money.
The goal of credit counseling is to provide a solution that helps you achieve debt relief and get on a financially healthy path.
The service is free and can be done over the phone or online. Credit counseling does not have a direct impact your credit score, but if the advice provided helps pay down your debt with on-time payments, it can lead to an improved score.
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
- Debt Analysis – An review of the debt accounts in your credit report
- Recommendations – An action plan with recommended debt solutions, and alternatives available to you.
The action plan is only a suggestion. Credit counselors give you an understanding of your financial situation and empower you to take action, if needed.
A recent study on credit counseling by researchers at Ohio State University found that those who received 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 (NFCC) 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, consider bankruptcy 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 debt management plan is not a loan and doesn’t reduce the amount of money you owe the credit card company.
What a debt management plan does is make it easier – and more affordable – to pay off credit card debt in 3-5 years, without having to take out a loan. Credit card companies offer reduced interest rates to people who enroll in a debt management programs in exchange for closing your credit cards and making consistent, on-time monthly payments.
Dropping the interest rate to 9% (and sometimes lower) reduces the consumer’s monthly payment to an affordable level, while paying off debt in 3-5 years.
Nonprofit agencies do charge a fee for this service. There is a one-time, set-up fee (usually $50, but not to exceed $75), and a monthly service fee averaging $32, depending on your state and debt amount. Learn more about DMP fees.
The certified counselors at InCharge can provide pre-file credit counseling and pre-discharge bankruptcy education for consumers filing bankruptcy. Both sessions are required for anyone 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. There is a fee involved, but that fee can be waived if you can’t afford it.
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.
When Should You Consider Debt Counseling Services?
Credit counseling is valuable at any decision-making stage of your financial life, but probably most valuable when you realize you can’t keep up with expenses and must find a way to reduce debt.
Some typical examples of situations when credit counseling would help include:
- A job loss or reduction in work hours causes financial problems.
- Your work is steady, but you’re still living paycheck-to-paycheck because you can’t create a budget or don’t have the discipline to live with one.
- You use credit cards to pay everyday expenses like rent, utilities, food and gas because you don’t have enough cash in your wallet or money in your bank account to pay those expenses immediately.
- Overspending on things like dining out, entertainment and clothing means there is never enough money left over at end of month to put in savings account or emergency fund.
Situations like this are common and correctable. Credit counselors have experience dealing with the issues that weigh consumers down and can offer a list of suggestions and solutions that will change the direction of your financial life for the better.
Credit Counseling to Reach Your Financial Goals
Credit counseling isn’t only about offering debt-relief solutions. Certified counselors are trained to ask consumers to look past the short-term financial problems and set long-term goals that will help them avoid future problems.
Here are goals you can work toward once you have your debt under control
- Buying a home
- Buying a car
- Sending children to college
- Funding a retirement plan
- Establishing an emergency fund
- Planning a vacation
These are achievable goals, if you have the right plan. Good credit counseling will help you shape that plan.
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.