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Free credit counseling is an invaluable service that can help you zero in on the right debt relief solution. But you need to ask the right questions to get the most out of it.
If you’re struggling to pay off credit card debt, free credit counseling can help you explore options for debt relief to find the best solution for your needs. Nonprofit credit counseling services provide information on your best option to get out of debt, free of charge.
This is what you can expect when you contact a credit counseling agency for help:
During your consultation, there are some key questions that you need to ask if the counselor doesn’t provide the information upfront. These will help ensure you’re dealing with an accredited credit counseling organization. Scams happen and some companies like debt settlement companies often intentionally mislead people into thinking they’re signing up for one service, instead of another. By asking these thirteen questions, you can ensure you’re getting the right help for your needs.
The first thing you want to confirm is that the agency you’re talking to is not-for-profit. Some, but not all credit counseling agencies are 501(c)3 nonprofit organizations. As such, these organizations are held to different standards than their for-profit credit counseling counterparts.
Nonprofit credit counseling agencies are not allowed to advertise that as a selling point. However, they are permitted to tell you if you ask. Here’s why a nonprofit agency is better:
Reputable nonprofit credit counseling organizations will be part of a national trade association. These associations hold member agencies to high business and ethical standards. They require members to adhere to strict guidelines in providing credit counseling to consumers.
There are two main associations of credit counseling agencies in the U.S.:
Working with an agency that belongs to one of these organizations ensures you will receive the highest standard of service.
The credit counselor that you speak with should be certified. This means that they went through a rigorous training process to learn about finance, specifically with regard to relief options for credit card debt. They also received training on how to provide counseling fairly and without bias. They would be required to train with a mentor and pass a certification test, as well as an ethics test.
All national trade associations require credit counselors to be certified and to recertify every two to three years. However, even if the counselor says the agency belongs to a national trade association, make sure that the person you’re speaking with is a certified credit counselor and not a customer service representative.
Once the certified counselor reviews your debts and budget, they should be able to tell you two things:
On average, debt management programs lower eligible consumers’ total credit card payments by 30 to 50 percent. However, the amount your monthly payments will decrease depends on your debts and budget. Before you finish the call, you should know exactly how much you’d pay. This information will help you make an informed decision and compare a DMP to other solutions, such as debt settlement.
Fees for a debt management program are low compared to other solutions, but you will still pay something. There is generally a setup fee and monthly administration fees. For nonprofit agencies, these fees are capped at $79 nationwide and often capped even further by state regulations. On average, eligible consumers usually end up paying about $49 per month for the agency to run their debt management program.
Any fees will be rolled into your debt management program payment and will be based on the level of financial hardship you face. The credit counselor should be able to tell you exactly what fees you’ll pay before the end of your free session.
The counselor should also be able to tell you exactly how many months you’ll be enrolled in the program. On average, most DMP plans run for about 36 to 60 payments. In other words, you should be out of debt in less than five years.
Most agencies usually require you to make payments by Direct Debit from your checking account. This means that you will pick a monthly payment due date that works for your budget and bill pay calendar. You’ll give the credit counselor your bank routing number to set up an ACH transfer from your account. On your monthly due date, the funds will be withdrawn from your account.
Some agencies may provide other methods of paying, although this is rare. If you set up Direct Debit and find that you can’t make your payment one month, simply call the agency. They should be able to help you make arrangements to accept your payment later, so you can stay enrolled.
Some, but not all, credit counseling agencies allow you to leave a credit card out of the program for emergencies. Others may require you to enroll every open credit card account you have. Remember that the credit counselor will check your credit report, so they know what cards you have open.
Whether you decide to work with an agency that requires you to include all your cards is up to you. Keep in mind that all cards you enroll in the program will be frozen while you are enrolled. Your credit card companies will generally close the accounts once you pay them off.
Some people prefer to keep a card open for a few reasons:
A key part of the credit counseling process is the credit counseling team calling your creditors to negotiate. There are three things they’re working to accomplish:
Most major creditors and even private retailers that offer store credit cards will readily agree to work with nationally recognized counseling organizations. But in some cases, the agency may be able to help you include other debts, such as:
If you have other debts to pay off, check to see if they can be included in your DMP. Even if the agency doesn’t have a standing relationship with the creditor, they may be able to negotiate. The more debts you can include in a DMP, the closer you can get to being completely debt-free.
Debt consolidation refers to any solution that rolls repayment of multiple debts in a single monthly payment. A debt management program is one way to consolidate debt because it creates a consolidated repayment for your credit cards. But it’s not the only way to consolidate.
There are also do-it-yourself solutions for debt consolidation:
If you have a good credit score, then both solutions could work for you, depending on how much you owe. Balance transfers tend to work best if you owe less than $5,000. Debt consolidation loans can work up to $25,000, as long as you can afford the monthly payments.
As long as the agency you call is a nonprofit agency, the credit counselor will discuss these options readily. That way, you can see if you can try to solve your challenges with debt on your own. This may also help you avoid having to close your accounts and potentially drop your credit score.
A DMP can have a varying effect on your credit, depending on where your score is when you enroll. Unlike other debt solutions, such as settlement, a debt management program does not create any notation item on your credit report. You will also build a positive credit history while you’re enrolled. Every DMP payment you make will appear the credit history of the accounts you included in the program.
On the other hand, once you complete the program your creditors will usually close your accounts. Although these accounts will be listed as paid in full, they will still be closed. This can negatively affect your score because it will reduce the number of active, open accounts that you have. If you also close your oldest account, it can decrease your “credit age.” All these factors can drop your credit score if your score is high when you start the program.
However, if your score is low when you start the program, then you can actually see your credit score increase. So, the results vary depending on where you start. You need to ask the counselor what will happen to your score given your credit history. The counselor should be able to help you set the right expectations for your score before you enroll.
Once you enroll in a debt management program, companies that provide other solutions will descend on you. They will try to convince you that they have a better, faster, cheaper, easier solution. Debt settlement companies are notorious for this. And they won’t tell you about the negative credit effects of settlement.
Full disclosure, debt settlement usually is a faster, cheaper solution. As long as you don’t mind damaging your credit score with each debt you settle, settlement can be a viable solution. But each debt settled creates a negative item in your credit report that sticks around for seven years. This can significantly damage your score. But if you want to avoid further credit damage, then you don’t want to settle.
A consumer credit counselor that works for a nonprofit agency should be willing to have an open, honest conversation to help you compare debt management to debt settlement. They’ll help you understand which solution is better for your unique financial situation. They’ll also help you consider bankruptcy if that’s an option you’re willing to consider.
Having the ability to discuss all your options with an unbiased professional is invaluable. Most experts drive you into whatever solution their company sells, but a nonprofit credit counselor will give you the unvarnished truth.
Once you get out of debt, you’ll need the skills to stay out of debt. Budgeting, saving, financial planning for major life events. Techniques for rebuilding your credit score so you can qualify for low interest rates. Information on how to use credit cards in a healthy way or other tools that can help you maintain a high score without credit cards.
The top credit counseling organizations offer extensive financial education programs to their clients. They may have financial literacy courses, budgeting tools or credit recovery resources. Some agencies also offer additional services, such as housing counseling and financial coaching.
Check to see what services the agency offers. The more support your credit counseling agency can provide, the less likely you are to run into more challenges with debt in the future. Your goal should be to achieve long-term financial stability. The credit counseling agency you choose for your debt management program will be your partner in achieving that.
Article last modified on July 29, 2019. Published by Debt.com, LLC