9 Things You Need to Know about Credit Counseling
10 October 2015
Swimming in a sea of debt? Before you wind up with your head barely above water, you might want to reach for a life preserver. In a lot of cases, that life preserver is credit counseling.
Seeking help from a nonprofit credit-counseling agency “can be a very smart move,” says credit expert Gerri Detweiler, author of “Reduce Debt, Reduce Stress.”
So, what is credit counseling? How does it work? To help you navigate rough financial waters, here are nine things you should keep in mind about credit counseling.
1. You need to understand what credit counseling is.
Simply put, credit counseling can help you lift the burden of credit card debt.
Through a nonprofit credit-counseling agency, you can work with a counselor to resolve your financial problems on your own, says Bruce McClary, vice president of public relations and external affairs at the National Foundation for Credit Counseling. Or you can enter what’s called a debt management plan. Through that plan, you can consolidate your credit card payments and get the cards’ interest rates reduced, making your financial obligations easier to tackle.
“After three to five years of payments to your credit card issuers, you’ll exit the plan with no credit card debt and a great credit score,” says John Ulzheimer, a credit expert.
While you’re in a debt management plan, your credit card issuers won’t report you as being delinquent on your bills as long as all of your payments are made on time, Ulzheimer says.
Keep in mind that a nonprofit credit-counseling agency will charge fees for participation in a debt management plan, but experts say that cost is minimal compared with a hefty debt load.
2. You need to do your homework.
Check out the Better Business Bureau ratings of credit counseling agencies you’re considering, Detweiler says. In addition, find out whether those agencies carry industry accreditation and whether complaints have been filed against them with your state attorney general’s office.
3. You don’t need to pay for credit counseling.
Visit the website of the National Foundation for Credit Counseling to find a nonprofit credit-counseling agency near you. All agencies affiliated with the foundation provide their services at no cost, except for those debt management fees.
“If the counselor asks for money upfront or wants all of your details before they give you free information about their services, be wary,” says consumer credit expert Beverly Harzog, author of “The Debt Escape Plan.”
The Federal Trade Commission warns that nonprofit status doesn’t translate into a credit counseling agency’s services being free, affordable or even “legitimate.”
“In fact, some credit counseling organizations charge high fees, which they made hide; others might urge their clients to make ‘voluntary’ contributions that can cause more debt,” the commission says.
By and large, however, nonprofit credit-counseling agencies are trustworthy.
4. You should be suspicious of for-profit debt settlement businesses.
Some for-profit businesses essentially pose as credit-counseling specialists, according to Ulzheimer, but all they want you to do is cough up cash for their debt settlement services.
McClary advises consumers to be skeptical of for-profit providers, since they aren’t required to offer “meaningful educational value” along with their debt settlement services.
“There are hundreds of companies that claim to offer consumers ways to erase bad credit, create a new credit identity, or even remove bankruptcies, judgments or liens from credit files. Many of these services are outright scams and should be avoided,” says Mike Long, executive vice president and chief credit officer at UW Credit Union in Wisconsin.
5. You’ll need to examine your finances.
Before you go through your first confidential session with a credit counselor, you’ll have to gather your credit card bills as well as details about your household expenses and income. The counselor will use that information to figure out solutions to your debt problems, McClary says.
So that you don’t overlook any of your debts, Detweiler recommends obtaining a free credit report from AnnualCreditReport.com.
6. You should feel comfortable with your counselor.
Just because a counselor has been assigned to you doesn’t mean you have to remain with that person. If you don’t feel at ease with a counselor, ask for a new one, Harzog says.
“Find someone who makes you feel like you have hope and who is supportive,” she says.
If you’re still not satisfied, consider switching to another nonprofit credit-counseling agency.
“It can be challenging to open up to someone else about a very personal aspect of your life.
A successful client comes with an open mind to hear what options they have and ways to improve their financial situation,” says Kathryn Bossler, personal finance counselor in the Detroit office of GreenPath Financial Wellness, a nonprofit credit-counseling agency.
7. You must stick to the plan.
Credit counseling helps many people dig out of a financial hole. But it works only if you follow the plan you’ve worked out with your counselor, experts say.
“If a debt management program is used as a way to resolve debt issues, it is most successful when coupled with the budget advice given by the counselor,” McClary says. “Follow that advice and make timely payments to your creditors through your debt management plan, and you are on the road to being debt-free.”
Under a debt management plan, you’ll normally make one payment to the credit counseling agency each month or pay period, according to the federal Consumer Financial Protection Bureau. The agency then makes monthly payments to your creditors.
8. You’ll need to be patient.
You didn’t get into debt quickly, and you won’t get out of debt quickly. If you aren’t willing to devote three to five years to wipe out your credit card debt, then you might as well hire a attorney and file for bankruptcy, Ulzheimer says. Just keep in mind that hiring a bankruptcy attorney is expensive, and a bankruptcy will stay on your credit record for seven or 10 years (depending on the type of bankruptcy).
9. You must control your spending.
All of the time and effort you spend on attacking your debt won’t do any good if you return to your old spending habits. “You’ll need to become much more realistic about the process of properly managing credit. It’s easy to get into a load of credit card debt and very difficult to get out of it,” Ulzheimer says.