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What Is Credit Counseling And Can It Help You Get Out Of Debt?

Andrew Dehan6-Minute Read
February 04, 2022

The first step to getting out of debt is understanding it. Knowing how it accrues and how interest builds will lay the groundwork to creating a schedule to pay off your debt. If you need more information and want to consult an expert, credit counseling can help you get your affairs in order and address your debt.

What Is Credit Counseling?

Credit counseling is a service for those struggling with bills who need help developing a path out of debt. It’s usually provided by nonprofit organizations for free. While it’s available to anyone, it’s geared toward those who feel buried by debt.

Credit counselors devise debt management plans, accounting for income and budget, to help people take control of their finances.

How Do I Know If I Need Credit Counseling?

Many people could benefit from credit counseling. If you have financial questions and need help developing a personal budget, credit counseling may be helpful for you. For those who have difficulty paying bills, which has grown especially hard during the pandemic, credit counseling can simplify your finances and make them more manageable.

Read on to discover a couple signals that might indicate you need credit counseling.

You’re Being Hounded By Creditors

If you’re receiving letters and calls about late payments, you can benefit from credit counseling. These calls from creditors should not be ignored. Not only will ignoring payments make your debt grow, but it will have a terrible effect on your credit, limiting the possibility of anyone lending to you in the future.

There are limits to how far creditors can go in their efforts but they can still take you to court. Get credit counseling before that happens.

Your Debt Is Creating An Emotional Burden

Debt can have a huge psychological impact on you. If your debt is limiting your ability to enjoy your life, it’s taking an emotional toll. Credit counseling can help this because it will remove any mystery or surprises around your finances and give you a solid plan to follow. When you know what to expect and have a path to achieving your goals, things become easier to handle.

Do I Have To Be Sinking In Debt To Access Credit Counseling?

No, you don’t. In fact, the sooner you start, the better. Many people can benefit from credit counseling. The moment you feel like your finances are getting away from you, you should investigate places that can help.

How Does Credit Counseling Work?

Legitimate credit counselors offer a wide range of services. Most of them are nonprofits or not-for-profits. Before scheduling an appointment, read some reviews about the service.

Unfortunately, there are predatory services that aren’t interested in helping as much as they are keeping you in debt. Before scheduling an appointment, make sure the organization is accredited by the National Foundation for Credit Counseling. Check with the Better Business Bureau to see the organization’s standing and read reviews.

Once you locate a counselor, they should start by walking you through these steps.

Initial Appointment

Your first appointment is going to be an information-gathering session. You will need to bring all your financial information to the appointment. With this documentation, the counselor can get a complete picture of your finances and help you establish a plan.

Be on your guard if the counselor pressures you to purchase financial education resources. Most credit counseling services offer these for free. If you’re being pressured to buy something, question whether this is the right place for you.

Next Steps

After the initial appointment, the counselor and client can decide on next steps to take. These include creating a budget, planning for emergencies and big purchases and connecting you with other financial tools and programs to lighten your load.

Many places will overview your finances and help you create a budget free of charge. If you require more counseling, there may be fees associated with it.

Debt Management Plan

There are also programs you can enter that set you on a track to debt management. These are not free of charge, often coming with a setup fee followed by a monthly fee. This may be waived depending on your finances or the state you live in.

Debt management plans will consolidate any of your unsecured debt, such as credit cards, medical bills and student loans. This could lower your interest rate. The savings from this alone could more than pay for any fees associated with the plan.

These plans can be helpful for those who are at the end of their rope. Beware of counselors who push these plans upfront. They do cost money and can take 3 – 5 years to pay off. On top of that, you may not be allowed to pay more toward the debt.

Debt Settlement Vs Debt Management Plan

Debt settlement companies are not the same as those offering debt management plans. For one, debt settlement companies are usually for-profit. They encourage you to stop paying your creditors and negotiate in your stead with creditors to try to get them to accept a smaller lump sum.

The problem is they may not have an upfront agreement, your credit score will drop due to nonpayment and you could still be sued by the creditors. It’s a risky situation. At the end of it, the settlement could result with you paying a lump sum to the creditor or you could be put on a debt management plan.

The debt settlement company collects on their fee once a settlement is reached. You can’t legally be charged a fee for debt settlement until an actual settlement is in place.

Bankruptcy Counseling

In some cases, bankruptcy may be the best alternative. Research other options first as bankruptcy can destroy your credit and make things difficult down the line. Before signing any paperwork, speak with a reputable bankruptcy lawyer.

How Can I Find Reputable Credit Counseling Services?

If you’re in debt, you may feel overwhelmed. Don’t let this turn you desperate or cloud your judgement. There are reasons why predatory companies exist in this space – they know people are vulnerable and will take advantage of them.

So how do you find reputable credit counseling services?

Government Resources

Many government agencies offer consumer protection services. While they don’t directly license credit counseling services, the U.S. Department of Justice maintains a list of reputable credit counseling services.

The Federal Trade Commission and the Consumer Financial Protection Bureau offer advice on how to choose a credit counseling service. Also, look at your state’s Attorney General’s site, as well as the Better Business Bureau and local reviews to research a credit counseling service before moving forward.

Accreditation

Both the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America offer credit counseling accreditation to credit counseling services. These organizations offer a ton of valuable resources and can recommend credit counselors in your area.

Alternatives To Credit Counseling Services

Balance Transfer

Depending on how much credit card debt you have and how quickly you can pay it off, opening a new credit card account may be the solution. Balance transfer cards allow you to transfer your debt to a card that offers 0% interest for a set period, usually 6– 24 months.

Be aware of the terms of these credit cards. If you don’t pay off the balance within the 0% term, you may have to pay the interest dating back to when the original balance occurred. If this is the case, only use a balance transfer card if you’re sure you can pay off the full debt in the time frame with 0% interest.

Debt Consolidation Loan

Debt consolidation loans can be helpful if you have multiple high-interest loans or debts. By consolidating them under one loan with a low interest rate, you can potentially save money on interest.

This will only work with a plan to get spending under control. Couple a debt consolidation loan with sticking to a budget and you’re on your way out of debt.

Debtor’s Anonymous

For many people, debt revolves around feelings toward money and financial responsibility. Spending money feels good and managing your finances can be scary if you’ve overspent.

If you feel in over your head and need to talk about it, Debtor’s Anonymous may help. This is a 12-step online recovery program that offers group and individual support to help you stop incurring debt.

The Bottom Line: You’re Not Alone. There Is Help Available.

You’re not alone. Latest statistics show over half of Americans are carrying credit card debt. If the debt is too much for you to handle and you feel like you’re having trouble controlling it, a reputable credit counseling service may be right for you. You don’t want to ignore it and end up being sued or having to declare bankruptcy. Do your due diligence and find a reputable credit counselor to take control of your money and make it work for you.

Learn more about managing your finances by visiting our Learning Center.

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    Andrew Dehan

    Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.