Consumer Credit Counseling: What You Should Know

If you find yourself in unmanageable debt or wanting a fresh, debt-free start, using a consumer credit counseling service may be a viable path for you.

You’ve Got Debt – Now What?

Bankruptcy isn't the only way to get rid of your debts. Scheduling a free credit counseling session with an accredited, nonprofit credit counseling agency is a great place to start on the path to becoming debt-free.

During your free session, a certified credit counselor will look at your income, expenses, and debts. Based on this information, they will recommend a debt relief plan that best fits your situation. They may recommend debt consolidation, a debt management plan (DMP), debt settlement, or bankruptcy.

What Is Debt Consolidation?

Debt consolidation can be a great choice if you have a high enough credit score to qualify for a debt consolidation loan. When you consolidate your debt, you take out another loan at a lower interest rate and use the funds to pay off your existing higher-interest debts. As a result, you pay less in interest and you only have one monthly payment. The goal is to get a monthly payment that's lower than the combined monthly payments of your debts before they’re consolidated. 

What Is a Debt Management Program?

If your credit score isn't high enough to qualify for a good debt consolidation loan, your credit counselor may recommend a debt management program (DMP). With a DMP, the credit counseling agency acts like a partner in repaying your debt. Your credit counselor will work with you to create a plan that address all your debts with a monthly payment you can afford. The credit counselor also will try to negotiate a better interest rate and lower monthly payment with each of your creditors.

The credit counseling agency manages your DMP, and you make a single payment to the agency each month, rather than to each individual lender or creditor. The agency then distributes funds to the financial institutions you owe, per the terms of your plan.

What Is Debt Settlement?

Debt settlement isn't often the first option most people consider, but it an work well if you have primarily credit card debt and you have enough money to make a large lump-sum payment. When you negotiate to settle your debt, you contact each creditor and make an offer to pay, in a lump sum, less than the total you owe on your debt. If the creditor accepts, you get to pay less than what you owe and the creditor gets to recoup at least some of the money and they don't have to continue paying to pursue you for the debt.

Be aware that debt settlements will initially harm your credit. Though it takes some effort, you can settle the debts yourself. You can also hire a debt settlement company, but do so with caution: Many debt-settlement companies are scams. Do your research before you hire help and especially before you pay anyone anything!

How Do You Find Credit Counselor and Prepare for Credit Counseling?

The first step on your debt-free path is to find a good credit counselor. Then you'll want to take some time to prepare for your appointment by gathering your financial documents, bills, and credit card statements. Finally, attend your appointment with the credit counselor. Ask lots of questions, take notes, and make sure you understand your options. Empower yourself to take the next best step to improve your financial situation.

Step 1: Find a Good Credit Counselor

To get unbiased opinions for your best course of action, it's best to begin your quest for debt relief with an accredited nonprofit credit counseling agency. Luckily these agencies are easy to find. Simply visit the National Foundation for Credit Counseling (NFCC) website and search for a provider. The NFCC holds its members to strict quality, financial, and ethical standards.

What Services Do Credit Counseling Agencies Offer? Is It Free?

NFCC-accredited agencies always provide free credit counseling. Beyond that, they may charge a fee for some of their services, such as facilitating a debt management plan. Some agencies may offer a fee waiver for eligible clients, so be sure to ask if your income is a barrier to getting help.

Credit counseling agencies may also provide budget counseling, bankruptcy counseling, financial counseling, pre-rental housing counseling, foreclosure prevention counseling, student loan counseling, first-time home-buyer counseling, and more. Make sure the agency you choose provides the services that you need. Whichever agency you choose, your initial consultation should be free.

Is a Credit Counseling Agency the Same as a Debt Relief Company?

No! There are many players in the world of financial and debt management, including many for-profit agencies that may sell you services to you that you don't need. For-profit credit counseling agencies are sometimes called debt relief companies, debt negotiation companies/services, or debt settlement companies.

A non-profit credit counseling agency will never charge for you the initial credit counseling and won't ask you to pay any up-front fees to help you manage your debt. For-profit companies may have enticing offers, but they often can't live up to their promises. If you hear an offer that sounds too good to be true, it probably is.

If you're feeling tempted to pay for help from a for-profit agency, check to see if previous clients have filed complaints with the Better Business Bureau or your state attorney general. Also, look at the third-party online reviews of the agency from places like Google or Yelp.

Step 2: Gather Your Financial Documents and Understand Your Priorities

Before your meeting with a credit counselor, it's important to gather your bills, paystubs, and bank statements — anything that will help you list all your debts.

You’ll also need your credit report from each of the three major credit bureaus. You're entitled to a free credit report from each of the three major bureaus (Equifax, Experian, and TransUnion) once a year. Having your credit report allows you to cross-reference your debts, but don't rely on it to determine all of your debts. Some debts aren’t reported to the credit bureaus until they're sent to collections. Past-due medical bills are a good example and a major source of debt for many people struggling financially.

What is all this documentation for? It'll help you (with the help of your credit counselor) create a budget, which is the first step to creating a plan to deal with your debts and regain your financial health.

After you've gathered this information, reflect on what you're hoping to achieve both short term and long term. Think about your personal goals as well as your financial goals. Your life goals will help to set your financial goals.

This step will give you a good idea of your financial situation and what educational materials you may want to ask for. Your credit counselor will be able to help you create a realistic plan to achieve your financial goals once they review all of your documentation.

Step 3: Find Your Path to Debt Relief With the Help of a Credit Counselor

Once you decide to use a credit counseling agency's services, make sure you understand your contract with the company. You need to know what services the company plans to provide to you for the fee you're paying. If there is anything you don't understand, ask questions until your understanding is clear.

Let's Summarize...

Credit counseling is a great start on the road to debt relief. It's important to research different credit counseling agencies to make sure they provide the services that you need. It's also a good idea to get your bills, paystubs, and bank statements together before the first meeting with your credit counselor. A credit counseling agency can help you create a budget and plan to deal with your debt.