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 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 eliminate debt on your own, they can also help you enroll in a debt management program. 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 counseling agencies earn revenue through fees. That means their plans tend to be more expensive for the credit user.
By contrast, non-profit agencies are supported through grant money. Credit card companies provide grants non-profit agencies can help their customers get out of debt. This means lower fees for the credit user. In fact, non-profit agencies offer debt evaluation entirely for free. They only apply fees to set up and run a debt management program.
For most people who are struggling with debt, non-profit credit counseling is the better option. You pay fewer out-of-pocket costs, which can be helpful. That last thing you need as you get out of debt is a big bill. If you’re looking for non-profit counseling services, fill out the form at the top of this page. Debt.com only refers you to the best accredited non-profit consumer credit counseling services.
How does credit counseling work? The nonprofit version.
Step 1: Free evaluation
One of the problems people encounter with debt is that they don’t know what solutions to use. Until you get into debt, you don’t know all the options available to get out of it.
Certified credit counselors understand all the options available. So, they can help you assess which one is right for your unique financial situation. Counseling sessions are usually done over the phone.
- To start the process, the credit counselor will ask for some basic information. This includes:
- Your income
- Current debts, including secured debts 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
- You also authorize the counselor 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” credit inquiry, so it does not impact your credit score.
- 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. 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 get out of debt. 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 program. 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 the counselor asks which debts you want included in the program. Enrollment is 100% voluntary, so there’s no requirement to include all your accounts.
- 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.
- Together, you set a monthly payment you can afford to make.
- The counseling team then works with your creditors.
- This helps prioritize your debts for repayment
- Each creditor must sign off to include their debt in the program.
- Your counselor also negotiates with each creditor to:
- Reduce or eliminate the APR applied to your debt
- Waive future penalties and late fees
- Once all your creditors agree, you sign some paperwork and your program starts.
Stop struggling to pay back everything you owe! See if a debt management program can help you get out of debt fast to save your credit and minimize interest charges.
Step 3: Your counselor’s role during enrollment
- Each month, you make one payment to the credit counseling agency; they send the money to your creditors as planned.
- During your enrollment, the counselors will also help you create a budget. This allows you to live without any relying on credit cards. Be aware that any account you include freezes when you start the program.
- They also provide free resources you can use to build financial literacy; this helps you learn how to avoid debt problems in the future and plan for long-term financial stability.
- If you run into trouble during your program, you can talk to the counseling team to make special arrangements.
The idea is that the counseling team helps you become a better money manager that’s more effective at managing debt. That way, once you get out of debt, you can stay that way.
What do credit counseling services do?
What can credit counseling do?
- Answer questions about various options for debt relief
- Assist you in identifying the right debt solutions for your needs
- Help you eliminate your existing credit card debt
- 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 about your debts.
- Provide resources to build financial literacy
- Teach you how to budget and manage debt effectively
- Help you establish long-term financial stability
What can’t it do?
- Repair your credit (that’s a different service)
- Provide immediate debt elimination – debt management programs take about 36 to 60 payments, on average.
- Settle your debt 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, tax debt 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 debt management program 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 debts need to be with the original credit issuer. In other words, if all your debts are charged-off, you may be better off with settlement. Although you may be able to include debt collections in a DMP, collectors are less likely than to sign off.
- Most of your debt problems 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?
Credit score is not a factor with 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 program. 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 doesn’t negatively impact your ability to qualify for new financing. Even if you enroll in a debt management program, 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 a higher education. This way, you don’t have to put your life on hold while you pay off your credit card debt.
How to spot a nonprofit credit counseling scam
- They charge upfront fees before they perform any actual service – this is how you spot any debt relief scam, even for settlement. According to federal regulations, companies cannot charge a client fees until they provide some form of actual debt 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 new Social Security or Employer Identification Numbers (EINs) are scams! Credit 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 their options and only recommend the best solution. If an agency pushes you to enroll in their debt management program or recommends a different program, it’s not a nonprofit organization.
Is there any advantage with for-profit counseling services?
This really depends on the agency you work with and what they offer. In some cases, a company pairs credit 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 agency in order to keep fees low and ensure your plan is affordable.
Article last modified on October 19, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Credit Counseling - AMP.