Credit Counseling: Your Definitive Guide

Debt relief services are like weight-loss services. Many of them are worthless, and some are outright scams. But borrowers who need help with their debts can’t afford to waste any of their limited cash flows. Fortunately, credit counseling is one of the few reliable sources of affordable financial help. This guide will discuss how it works, when it’s worthwhile, and how to find a trustworthy provider.

What Is Credit Counseling?

Credit counseling involves working closely with a licensed credit expert. Counselors can help people with a wide range of financial problems, including:

  • Managing their debt
  • Building a budget
  • Improving their credit scores

Non-profit organizations are the most common providers of credit counseling services. Because they rely on donations and government funding, their services are more affordable than others. A non-profit credit counseling agency shouldn’t turn anyone away because they can’t afford to pay.

People struggling with their finances can almost always benefit from non-profit credit counseling. The first consultation should always be free, so it can’t hurt. And it will at least provide some general advice and point people in the right direction.

How Credit Counseling Can Help

Credit counseling gives people the tools, education, and guidance necessary to improve their finances.

Generally, it’ll include the following steps:

  • Free consultation and evaluation
  • Education and recommendations
  • Debt management plan (optional)

Here’s an explanation of what those steps entail and their benefits.

Free consultation and evaluation

Non-profit credit counselors usually offer at least one free consultation. For example, Credit.org provides a free call with one of their credit coaches to anyone who needs it.

The initial meeting gives the counselor a chance to assess the client’s finances. They can provide some initial advice, depending on how much information the client brings.

If the counseling relationship continues, it will usually include a complete financial review. That means the counselor will examine the client’s:

  • Income and expenses
  • Outstanding debt balances, both secured and unsecured
  • Monthly payments on each of their debts
  • Rates and terms on each of their credit accounts
  • Financial goals and priorities
  • Other details that might affect their finances (like an upcoming marriage or a child on the way)

They want to get as comprehensive a picture of the client’s finances as they can. But it’s dangerous to give this type of sensitive information away to the wrong party. So make sure to work with a reputable non-profit credit counselor.

The non-profit status doesn’t guarantee they have their client’s best interests at heart. And even if they’re legitimate, make sure to share all personal information securely. In-person is always best, if possible.

Education and recommendations

After the initial assessments, counselors prescribe their plan for improving the client’s situation. That entails working on both the client’s money management skills and financial issues.

For example, the plan may include:

  • Free credit advice: The credit system’s penalties for bad behavior lead to even more bad behavior. For example, defaulting on a loan leads to higher interest rates. Higher interest rates lead to defaulting on loans. It’s a vicious cycle. But credit counselors can break it. They can help their clients get by without credit until they improve their scores.
  • Resources and referrals: Non-profit counselors don’t have much financial interest in keeping anyone’s business. They’re much less likely to work with someone when it’s not a good fit. Instead, they can point people toward the help they need. Many other debt-relief providers will not, hoping to get a commission or fee.
  • Custom spending plan: Credit counselors build spending plans that address their clients’ cash flow issues. That usually includes a realistic budget and a way to hold the client accountable. Many personal financial problems stem from a lack of discipline, which counselors can reign in.

It often takes more than the first consultation to implement an effective financial recovery. The counselor may need to meet with their clients regularly to get them all the help they need.

Debt Management Plans

Sometimes clients are unable to make their debt payments on their own. In those cases, credit counselors might recommend a more drastic option. They’re called Debt Management Plans (DMPs).

While that sounds no different from implementing a budget, it’s an official term for their program. It’s also significantly more involved than other credit counseling services.

They can be helpful to some borrowers, but they’re a counselor’s last resort. And even with non-profit providers, they’re going to cost the client some money.

On top of the prior steps, a DMP entails:

  • Representation: During a credit counselor’s DMP, the counselor will act as a middle-man. They’ll intercede between the borrower and lender. Some predatory lenders use less than honorable tactics to get their borrowers to pay. That often includes badgering them with phone calls at all hours. When those borrowers take part in a DMP, the creditors will deal directly with the counselor. That can often take a lot of stress off the client.
  • Negotiation: Counselors take over all communication with a client’s lenders. They’ll usually use that opportunity to negotiate as best they can. If possible, they’ll try to get the lenders to agree to better debt terms for the borrower. That might lead to lower monthly payments or even interest rates.
  • Payment simplification: A DMP also consolidates the client’s monthly payments. Instead of paying each lender directly, they only have to make a lump sum to the counselor. The counselor uses those funds to pay all the creditors themselves. Borrowers who need a DMP were often previously juggling a half dozen or more payments at a time. The consolidation greatly reduces the likelihood of missing one.

A DMP is usually only for borrowers who are really struggling with their debts. If a counselor is pushing one when it’s not necessary, don’t work with them. Remember that DMPs are not free, and they might just be looking for money.

Is credit counseling right for you?

Credit counseling is a helpful resource for many people. It’s best for those who simply lack financial savviness or organization. Counselors are uniquely suited to provide information and discipline at an affordable price.

They can bring to the table:

  • An objective, well-informed third party who can answer questions and keep people accountable
  • An analysis of spending practices and assistance with personal weak points
  • A budget that eliminates waste while still respecting individual needs and priorities
  • Help with pulling credit reports, understanding credit history, and improving credit scores

Credit counseling won’t solve everyone’s financial problems. But it is almost always a great place to start, and it can keep people on an upward trajectory. Counselors help people figure out what they need to do, give them the tools to do so, and keep them accountable.

But credit counseling won’t be enough for people with problems beyond these. For example, sometimes people lose their only source of income. If they don’t have any savings either, a budget becomes a lot less useful. Those people would be better off working with a recruiter to fix their income problems.

That said, a good credit counselor might still be able to make a helpful referral. Advice from a financial expert can’t hurt in a crisis, especially when their services are free.

How to find a credit counseling agency

It’s not always possible to meet with a credit counselor in person, but most of them work with clients near them. Even when consulting with a counselor strictly over the phone, it’s best to choose a local one.

At the very least, people should work with one who understands the laws of their state. States influence debt regulations within their borders more than the federal government does.

So put together a list of agencies within a comfortable radius. It doesn’t have to be within driving distance, but closer is better.

To find a trustworthy candidate, focus on agencies that the government recommends. Many governmental bodies, both state and federal, compile complaints about debt-relief organizations.

Use that data to weed out scam artists and less than reputable groups. Take a look at each candidate’s reviews online. Get a thorough understanding of their reputation and fees.

After compiling a shortlist of local and reputable options, feel free to shop around. Take advantage of the free consultation with the best of them and see which one feels right.

What to look for in a credit counseling agency

Look for a credit counseling agency that is affordable, reputable, and honest. There’s no need to settle on any of these. They should cause no financial strain, have a stellar reputation, and communicate clearly.

Here are some of the items to inquire after when shopping around for the best options:

  • A list of all the services that they provide as part of their counseling
  • A corresponding list of the fees for contracting their services
  • The training and professional certifications that their counselors earn
  • Proof of their license to operate and offer credit counseling services

That isn’t an exhaustive list, but it’s a good place to start. If any of their answers to these questions are unsatisfactory, look elsewhere.

Want a more comprehensive list of questions to ask? The Consumer Financial Protection Bureau (CFPB) has a great resource on the subject.

Should you choose a non-profit or for-profit credit counselor?

It’s almost always better to work with a non-profit than a for-profit credit counselor.

Their services are not markedly different, but non-profits are almost always the cheaper option. They also typically don’t have the same financial conflict of interest. That means their advice is much more likely to be appropriate.

That conflict of interest is the biggest problem with debt relief services that profit off of their client’s business. It’s easy to wonder: Are their recommendations accurate or are they simply pushing people in a direction that will be profitable for them?

Of course, there are plenty of trustworthy for-profit credit counseling services. But working with a non-profit helps reduce the likelihood of that conflict. It’ll remove a lot of meaningless work and concern without diminishing the value of the services.

Consider other debt relief services

Credit counseling is a viable option for borrowers with manageable financial struggles. In fact, it might even be a good idea for people who already have a decent handle on their money. A non-profit counselor might be able to make some tweaks and help take their personal finances to the next level.

But it’s not right for everyone. If a lender or collector takes you to court, even a debt management plan (a credit counselor’s most aggressive option) won’t help. In that case, it’s worth considering other debt-relief options or working with another professional.

But even if a debt counselor can’t solve your problems, they should be able to answer many of the questions you have. It’s worth talking to them or consulting another expert before committing to any extreme debt-relief plans.

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