Protect your Credit through Counseling
You don’t have to be on the verge of bankruptcy to benefit from credit counseling. Anyone who is feeling pressure from debt or struggling with sticking to a budget can benefit from a meeting with a credit counselor.
Credit counseling services are aimed at helping consumers reduce their debt and manage their personal finances. When you contact a credit counselor, you can expect to be asked for information about your income, expenses and credit card use. You’ll be asked about debt and whether you’ve been contacted by collection agencies. The counselor will also want to discuss your personal long-term financial goals, such as saving to buy a home or investing for retirement.
What to Expect from Credit Counseling
A credit counselor will look at your unique financial situation and help you understand how you got there and what you can do to reach your long-term goals. For most people, this includes advice on how to control spending and creation of a new budget that includes debt repayment. The majority of people with credit card debt will be told to pay down their debt by making regular monthly payments on time.
For those with significant debt who are paying high interest rates, a credit counselor may suggest a Debt Management Plan, or DMP. If you are eligible for a DMP, the credit counseling agency will negotiate on your behalf with each of your creditors to obtain reduced interest rates and a more convenient monthly payment plan. While your DMP is in effect, you make one payment to the credit agency each month; the agency takes your payment and pays each of your creditors. The plan continues until your debt is paid off
A DMP should be suggested by a credit counselor only after she has carefully reviewed all of your financial information. Many people successfully reduce or eliminate their debt under a DMP, but it’s not the ideal solution for everyone. The plan can only be used for unsecured debt, such as credit card debt, but not mortgages, car loans or student loans. Another limitation is that you must agree to close all credit card accounts and not open new accounts while the DMP is in effect. Also, since the DMP is a voluntary agreement between the agency and your creditors, missed payments will probably cause your creditors to suspend their concessions.
How Credit Counseling Impacts your Credit Score
Not all debt problems can be solved with a DMP. In some cases, a credit counselor will suggest bankruptcy and provide the necessary information for filing. A counselor may also recommend visiting a bankruptcy counselor or attorney who can provide more details about the legal process. Although a bankruptcy can seriously impact your credit score for a few years, filing under Chapter 13 allows people who have a steady income to hold on to some property, such as a house or car.
Just meeting with a credit counselor should have no impact on your credit score. According to FICO, paying off your debt under a DMP should not affect your score directly. However, closing credit cards as part of setting up a DMP can cause a temporary dip in your score. This dip should disappear over time as you improve your credit by paying off your debts.
How Much Can You Expect to Pay for Credit Counseling?
According to the Federal Trade Commission, most credit counseling agencies are nonprofits that provide free or low-cost services through credit unions, universities, consumer protection agencies and religious organizations. Credit counseling services are provided in person, by phone and online; the FTC recommends in-person counseling that allows you and your counselor to build a relationship.
The FTC’s Telemarketing Sales Rules require all credit counseling agencies to provide their fees and services before you sign on the dotted line. The law also prohibits agencies who are setting up a Debt Management Plan from collecting fees before the plan is in place.
How to Find a Credit Counselor
When you’re choosing a credit counseling agency, heed the FTC warning; having a nonprofit status does not guarantee that an agency offers free or low-cost services. Some may still charge a high fee or ask clients to make a sizable contribution to their organization. Be aware that any reputable agency should be willing to provide information up front about all fees, especially fees related to a Debt Management Plan.
One way to find a reputable credit counseling agency is through the National Foundation for Credit Counseling, or NFCC, the nation’s oldest and largest nonprofit financial counseling organization. Agencies that are members of the NFCC must be accredited every four years to help maintain a high level of services. You can search for accredited counselors in your community by visiting the NFCC website. ■
Sources: consumer.ftc.gov, credit.org, nfcc.org and nerdwallet.com.
