Struggling to manage your credit cards and other debt? You might want to sign up for credit counseling to pay off your debts and repair your credit.
What is credit counseling?
Credit counseling is a process for eliminating your debts and improving your money management skills with the help of a credit counselor. Once you select a credit counseling agency, a credit counselor will be assigned to get you started. While many nonprofit credit counseling services are free, some may ask between $50 – $100 for specialized work.
The five main services that credit counseling agencies provide are:
- General financial counseling – A free hour long session to understand your financial situation including debts, income, expenses, and financial goals. At the end of this session, the counselor assists you in determining the most suitable course of action to pay off your debt or recommends additional counseling.
- Bankruptcy counseling – May be broken up into two sessions, prior to bankruptcy and recovering from bankruptcy. Both sessions are likely to ask for a fee to cover costs.
- Debt management plan – This is a plan to combine debt to reduce interest payments. A single monthly payment is made to gradually pay off the debt within a span of three to five years. The plan incurs a setup fee and a monthly fee.
- Student loan counseling – The counselor explores repayment options with you and assists in facilitating discussions with your loan issuers. The services may include both free and paid options.
- Housing Counseling – This service is for individuals facing challenges with rent payments or those looking to become first-time home buyers. Counseling is available to enhance your understanding and management of housing costs. Fees may apply based on the chosen service.
Where can you find a credit counseling agency?
The best credit counseling agencies are nonprofit organizations that hold accreditation or certification from either the NFCC (National Foundation for Credit Counseling) or the FCAA (Financial Counseling Association of America). They offer a comprehensive directory of nearby counselors on their website and have a nationwide presence with network offices in all 50 states. You can explore the free first session at multiple agencies to compare services before choosing who to work with.
What to look for in a credit counseling agency
- Accreditation and certification – Ensure that the credit counseling organization is accredited and certified. The majority of nonprofit agencies are affiliated with either the National Foundation for Credit Counseling or the Financial Counseling Association of America. These organizations have certification criteria in place to uphold a consistent level of education and quality among counselors.
- Cost – Before you proceed, make sure you know the monthly cost of the service.
- Ease of working – Prioritize, finding a counselor with whom you feel at ease since you will be sharing your financial information with them.
“It is important to keep in mind that credit scores cannot quickly and easily be fixed”.
Is credit counseling right for you?
A common misconception about credit counseling is that it is only beneficial for those in dire financial situations. This is not true. Credit counseling can provide valuable assistance to anyone seeking help with their credit and financial plans. If you are struggling to make payments on your accounts, reaching out to a credit counselor is worth considering.
With credit counseling, you can manage your debt that currently seems out of control and increase your credit score with time by maintaining consistent repayment behavior. A higher credit score also means better financing terms and can make the home buying process much easier. When it comes to saving for a down payment or participating in any housing grant programs, a 640 score will begin to open doors to the best kind of assistance programs.
For example, the Florida Housing Finance Corporation Hometown Heroes Grant offers a housing grant equal to 5% of the home purchase price. This grant can be used to cover down payment and closing costs for borrowers with a credit score of 640 or higher. However, individuals with lower credit scores may not qualify for similar home buying grants available throughout the United States.
How can you get the most out of credit counseling services?
The initial session will cover all aspects of your financial information from mortgage payments to eating out expenses. Therefore, to maximize the benefits of credit counseling, it is beneficial to prepare in advance by gathering all your financial information. This ensures that your credit counselor has the necessary details to provide personalized advice based on your specific situation.
Will counseling impact your credit history or credit scores?
No, just having a conversation with a credit counselor will not impact your credit history or credit scores. However, if the credit counselor enrolls you in a debt management program (DMP), it will be reflected on your credit history, potentially resulting in temporary lower credit scores until your debt is fully paid off.
Watch out for scams
When you are going through financial hardship, the only thing you are focused on is getting relief. Unfortunately, scammers are aware of this and target vulnerable individuals in order to make a quick buck. Look out for these red flags before working with a company.
- Makes unrealistic promises such as magically fixing credit report errors or eliminating debt overnight
- Requests payment upfront before providing any services
- Claims the ability to modify accurate information on your credit report
- Demands high monthly service fees or a significant portion of the money they claim you will save
- Advises you to pay them instead of your creditors
- Proposes obtaining an Employer Identification Number (EIN) instead of using your Social Security Number
- Promotes a debt management program as your sole option before understanding your financial situation
If you suspect a credit counseling agency may be engaging in questionable practices, you can report them to the Federal Trade Commission or your state’s attorney general.