How to find the best credit counseling program so you can get out of debt without getting scammed.
What is credit counseling?
Consumer credit counseling services help overextended credit users eliminate high interest rate credit card debt. It’s their mission to help you regain financial stability. Certified credit counselors evaluate your debts, budget, and credit. Then they help you identify the best way to get out of debt in your situation.
If you can’t pay off your balances on your own, they can also help you enroll in a debt management program (DMP). In this case, the credit counseling agency acts as a go-between for you and your creditors. They set up a repayment plan that everyone can agree on. Then they negotiate to reduce or eliminate interest charges.
These services are also called debt counseling and financial counseling. The terms are roughly interchangeable.
Types of counseling services
There are two types of credit counseling – for-profit and non-profit. The difference between the two is how they earn revenue. For-profit agencies earn revenue through fees. That means their plans tend to be more expensive for the consumer.
By contrast, non-profit agencies are supported through grant money. Credit card companies provide grants to non-profit agencies can help their customers get out of debt. This means lower fees for the consumer. In fact, non-profit agencies offer a one-time evaluation entirely for free. They only apply fees to set up and run a debt management plan.
For most people who are struggling to achieve stability, non-profit counseling is the better option. You pay fewer out-of-pocket costs, which can be helpful. That last thing you need right now is a big bill. If you’re looking for a non-profit counseling organization, we can help. Debt.com only refers people to the best accredited non-profit consumer credit counseling services.
Connect with a certified credit counselor from a nonprofit organization now to get a free debt analysis.
How does credit counseling work? The nonprofit version.
Step 1: Take advantage of your free credit counseling session
A common problem when people face financial challenges is that they don’t know what solutions to use to overcome them. Until you get into debt, you don’t know all the options available to get out of it.
Certified credit counselors understand all the solutions available. So, they can help you assess which one is right for your unique financial situation. Although you can start the process online by filling out a form detailing your situation, a credit counseling session is usually done over the phone.
First, the counselor will gather the information about your financial situation
To start the process, the counselor will ask for some basic information about your financial situation. This includes:
- Your income
- Current debts, including secured loans like your mortgage or auto loan
- Monthly expenses – i.e. groceries, gas, entertainment, subscriptions… everything in your budget
- Current balances on your credit cards, as well as the APR on each account
- Other obligations, such as payday loans and unpaid medical bills
Next, you’ll authorize a credit check
To complete the picture of your finances, the counselor will aks to run a credit check. This allows them to review your report to see if you have collections or other items of note. This is a “soft” inquiry, so it does not impact your score.
Then they’ll review your options
Once they have a good picture of your finances, the counselor makes recommendations for debt relief. This can include:
- Balance transfers
- Consolidation loans
- Debt management programs
- Debt settlement
Nonprofit counselors are required to review ALL your options.
Finally, the credit counselor will make a recommendation
They only recommend the best solutions for your situation. In other words, nonprofit agencies don’t try to “sell” their program. This makes counseling the best way to find a solution that fits your needs. You can get an unbiased, expert opinion about what you need to do to take control of your finances. You can ask questions about different solutions and learn how to minimize things like credit damage.
Talk to a certified consumer credit counselor today for an expert opinion on your best option to get out of debt.
Step 2: Debt management program enrollment
Both for-profit and nonprofit agencies can help you enroll in a debt management plan. Nonprofit organizations only recommend a program if it’s the best option for you; otherwise, they tell you where to go.
If a DMP is the right option, you can enroll through the same agency that evaluated you in Step 1. Here’s what you can expect:
First, you decide which accounts you wish to include in your plan
Enrollment in consumer credit counseling is 100% voluntary, so there’s no requirement to include all your cards. Most counselors will tell you to include everything. However, some people decide to leave a card out of the program for emergencies; if you decide to include that account later, you can talk to your counselor to add it in. All accounts included in the plan will be frozen during your enrollment.
Find a monthly payment that works for your budget
Together, you set a monthly payment you can afford to make. This single payment will cover all the accounts that you include in your DMP. The counselor will also help you set up a formal budget if you don’t have one already. The goal is to ensure you can comfortably afford your monthly payments and your other expenses, so you won’t have any issues living without relying on plastic.
Next, the credit counseling team negotiates with your creditors
Your counselors will reach out to each of your creditors. They have three goals:
- Make sure your creditors agree to accept payments through the counseling organization.
- Reduce or eliminate APR applied to your account.
- Stop all penalties and fees.
This will help prioritize which balances get paid off first. Each creditor must sign off to include their account in the program. You will receive acceptance letters from each creditor saying they agree to the terms of your plan.
Once all creditors sign off, your DMP officially starts
You make one monthly payment to the counseling organization, then they distribute the payment to your creditors as agreed. Payments are usually handled through Direct Debit from your checking account. It’s rare that an agency will accept payments online or by check. However, you usually have access to an online portal that tracks your progress and provides more information if you encounter any trouble. You still
Stop struggling to pay back everything you owe! See if a DMP can help you get out of debt fast to save your credit and minimize interest charges.
Step 3: Helping you learn better financial habits during enrollment
Your organization should also provide free resources you can use to build financial literacy. The goal is to help you learn how to avoid financial hardship in the future and plan for long-term financial stability. You should recieve information on how to budget, save, plan for financial challenges. The idea is that the counseling team helps you become a better money manager. That way, once you get out of debt, you can stay that way.
If you run into trouble during your program, you can talk to the counseling team to make special arrangements. They may be able to help you make arrangements to delay your payment without jeopardizing your plan entirely. They are basically there to be a financial coach and provide assistance to ensure you can graduate from your plan successfully.
What do credit counseling services do?
What can a credit counseling organization do?
- Answer questions about various options for relief
- Assist you in identifying the right solutions for your needs
- Help you eliminate your existing credit card balances
- This also includes other unsecured debts, such as unpaid medical bills and payday loans
- Eliminate the hassle of collection calls. Once you enroll, you can pick up the phone and tell them you’re working with an agency. Collectors must then go through the agency.
- Provide resources to build financial literacy
- Teach you how to budget and manage credit effectively
- Help you establish long-term financial stability
What can’t it do?
- Repair your credit (that’s a different service)
- Provide immediate debt forgiveness – DMPs take about 36 to 60 payments, on average.
- Settle your accounts for less than you owe; they can direct you to debt settlement services, but they can’t help you enroll in a settlement program.
- Provide direct assistance for other types of debt – mortgage, back taxes or student loans; however, they can refer you to other service providers.
- Stop existing court actions regarding your debt – if a collector already sued you and won, the ruling stands.
When would you use credit counseling?
Enrolling in a DMP through a credit counseling agency is not a magic cure-all. It won’t work in every situation for every type of debt. Even when it comes to unsecured debt, you need a specific set of circumstances for this to work. Those circumstances are pretty broad, but they don’t apply to everyone.
- You must have at least $5,000 in unsecured debt. If you owe less than that, use a DIY solution.
- You must have at least some income to make a reduced monthly payment. If you’re unemployed, this solution won’t work.
- Most of your accounts need to be with the original credit issuer. In other words, if all your balances are charged-off, you may be better off with settlement. Although you may be able to include collections in a DMP, collectors are less likely to sign off. In addition, collection accounts have no interest charges, so you lose one of the benefits of counseling (interest rate negotiation)
- Most of your financial challenges should be caused by credit cards. So, for instance, if most of your debts are unpaid medical bills, you don’t get any benefit from interest rate negotiation. In this case, you should work out repayment plans or settlements with the original service providers.
Will credit counseling hurt my credit?
Your credit score is not a factor in qualifying for credit counseling. The initial consultation, even with a credit check, won’t affect your score. There is no minimum score requirement to enroll in a debt management plan. In addition, when done correctly the program has either a neutral or positive effect on your credit. In other words, if you still have good or excellent credit, this program won’t set you back.
It’s also worth noting that working with debt counselors won’t negatively impact your ability to qualify for new financing. Even if you enroll in a DMP, you can still get approved for loans, such as a mortgage or an auto loan. You can’t open new credit accounts during enrollment. However, you can get approved for major financing to purchase a home or car or to fund higher education. This way, you don’t have to put your life on hold while you pay off your credit cards.
How to spot a nonprofit credit counseling scam
- They charge upfront fees before they perform any actual service – this is how you spot any relief scam, even for settlement. According to federal regulations, companies cannot charge fees until they provide some form of actual relief.
- They guarantee to improve your credit score by a certain number. Although data shows successfully completing a debt management program can improve people’s scores, there is no guarantee. Results vary based on where you started when you enrolled and what negative penalties you incurred prior to enrollment.
- They tell you to do something illegal. A certified credit counselor will never tell you to try and create a new identity to get away from your old debt. Companies that advise people to get a new social security number or Employer Identification Number (EIN) are scams! Counselors won’t even advise that you run or hide from creditors or collectors; they help you find ways to face your challenges directly.
- They try to drive you into signing up for a specific solution. Nonprofit agencies must advise a client of ALL the available paths to take to become debt-free and only recommend the best solution. If an agency pushes you to enroll in their DMP, they’re not following nonprofit counseling organization rules.
Is there any advantage of for-profit counseling services?
This really depends on the agency you work with and what they offer. In some cases, a for-profit company pairs counseling and credit repair. To do this legally, that means that they have both certified credit counselors and state-licensed credit repair attorneys on staff. In this case, they help you eliminate your debt and then help you dispute any lingering mistakes in your report.
Other for-profit agencies may continue to work with you to improve your financial outlook. These agencies trend more towards financial counseling, rather than just credit or debt counseling. They add components of financial planning into the mix, which help you build better long-term strategies.
However, outside of these types of package services, there is little difference with the actual debt management service provided. If money is already tight and you can’t afford the bills you have now, there’s little reason to add another. You’re usually better off going through a nonprofit organization to keep fees low and ensure your plan is affordable.
Article last modified on February 11, 2020. Published by Debt.com, LLC