Lines of credit, unsecured loans, and those little plastic credit cards we often rely on can be incredibly attractive. How else can you buy nearly anything you want without having the money on hand to pay for it? You might use an unsecured line of credit for home maintenance, an unsecured loan to pay for a vacation, or a credit card to pay for, well, just about anything. For the most part, these are convenient, socially acceptable options that are often useful in a pinch — they can, however, come with some serious consequences if not managed carefully.
When you’re receiving collections calls from creditors and bills that you’re unable to pay, it can be daunting. You might have an unforgiving repayment plan, the interest rate on your card might be high, your credit score might drop, and if you have money to spend using a debit card or cash, it could be going right back to the creditors. You may find yourself trying to decide which credit cards to pay, if any at all. You might even consider another loan.
Many people who go into debt do so out of necessity. The fact is that the cost of living is high, and money remains one of the top stressors for people living in the United States. Statistically speaking, this is especially true for younger generations and those with fewer financial resources.
Sooner or later, the stress of debt can become burdensome. It might affect your mood, your relationships, and even your physical health. You may feel embarrassed, alone, or like there’s not a fix.
Lots of places offer quick fixes for excessive debt. Many times, though, these offers are accompanied by high interest rates, which can lead to more debt. They may affect your credit score negatively and/or leave you with yet another payment to make for years to come. That said, many people are lost when it comes to their options.
If any of this resonates with you, a possible solution you may not have considered is credit counseling. It takes time, effort, patience, and a serious commitment to following sound debt advice, but it can give you skills that will set you up for an improved financial future.
How Excessive Debt Happens
Most people don’t set out to get into excessive debt. It usually happens slowly, over a matter of years. At first, you may get an unsecured credit card because your parents or mentor say you should. “It will build your credit rating,” they say. Or, “It’s handy for emergencies.” Perhaps, you don’t even use the card at first. You save it for that urgent need or use it in a disciplined way, spending only a little and paying it off each month.
Often, the problem comes when you realize that you can continue to use it to get things you need or want when you don’t have the cash or money in the bank to do it. For some, it doesn’t feel like real money. This can lead to overspending or treating yourself when you don’t actually have the funds. The purchases might seem small, but they can add up.
Then, life happens. Maybe, your budget is tighter than usual one month because of an unexpected expense. “Oh well,” you say. “I’ll just pay the minimum this month.” So, you pay $25 even though you’ve spent $250. This seems like a great deal, so you continue along this path. When your first credit card is filled up with charges, you apply for another credit card, but that one also eventually reaches its credit limit.
Worse, your financial situation might change. You might find yourself using your credit cards to meet basic needs and hoping that things will change soon enough so that you can get on top of it. But, by the time you do, those interest rates and payments show up, leaving you with more expenses than you might’ve ever had before and not enough money to catch up. In the end, it can be easy to get in over your head, to the point that you need a change.
Can You Fix Your Debt Problems Alone?
While some can fix their debt problems on their own, many people don’t know the best way to go about it. What should you pay off first, and how?
To do it yourself, it helps to start with a firm commitment to yourself that you’ll stop using credit. Then you can learn how to budget and create a plan for the next several months. Next, you may need to contact your creditors to negotiate so you can meet all your monthly expenses and still pay them something. This often takes a good amount of dedication to studying, a strong desire to know yourself better, and a firm commitment to your financial well-being.
It is possible to get out of debt without help. However, you may need someone to answer to besides yourself. You might need someone to help you explore your personal motivations for overspending. Or, you may need help learning how to manage your debt and finances. If you aren’t accustomed to negotiating for yourself, it can be extremely helpful to have someone with more experience doing it for you. For all these reasons, credit counseling agencies can be very useful resources.
How Can Credit Counseling Services Help?
Credit counseling services can help you get out of debt and into financial security. For the best results, it’s suggested that you follow the rules laid out for you and put in the requisite effort. For some, this can be tough. However, if you follow the plan your credit counseling agency gives you, the problem often becomes much more manageable.
With all of this in mind, you might wonder: What exactly is a consumer credit counseling service? First, consumer credit counseling is a specific type of counseling that primarily focuses on your attitudes towards money and credit and can help you gain a healthier financial mindset. It’s also a financial education service that teaches you how to manage debt and monthly expenses. You can get financial advice and recommendations based on your own unique situation and develop a personalized plan. You may also learn to see money in a completely different way so that you can gain control over it. Finally, some consumer credit counseling services offer the help of negotiating with and paying creditors each month out of a single monthly payment that you send them.
For many individuals, asking for help in the form of credit counseling services is the right step for a couple of reasons. It might be the first time that you ask for help outside of taking on more debt, meaning that you are confronting the debt head on for the first time. You’re opening up to another person about your finances, which can make you feel nervous and even exposed. But credit counseling services can help you see the whole picture and make informed steps, which will often make you feel more at ease.
How Credit Counseling Works
Generally, consumer credit counseling isn’t going to be a quick fix. You may still be paying the credit counseling agency a year or more from the time you start. And even with the credit counselor to help, you will likely have to put in a lot of effort to make it work. Here’s how the process goes.
Normally you’ll start with an intake interview. It may be necessary for you to gather bills, income statements, and/or pay stubs before the interview. During this first meeting with your credit counselor, you’ll usually go over all these figures. The counselor may ask questions to find out how you view money and credit and how your debt is affecting you.
Later, the counselor will likely lay out a preliminary plan for you and explain how the process works. Then, you’ll have the option of signing an agreement with the credit counseling service that requires you to make payments according to the agreed upon terms.
Debt Management Agreement
As part of the consumer credit counseling contract, you might be required to make a commitment to the service that you will not incur any more debt. This often means no more new credit cards, no new unsecured loans, and/or no payday loans or title loans. You may also commit to using only cash or a debit card. Most credit counseling agencies allow you to keep one credit card, although it’s recommended that you don’t use it to add to your debt.
Credit Counseling Course
As part of your agreement with the consumer credit counseling service, you are often required to take a credit counseling course. The course is meant to teach you enough about money management and credit to keep you from going into debt again and help you learn how you can make the credit counseling venture successful. You may have practice exercises to help you work on budgeting, along with questions about your financial background. The course material can help you remake your financial mindset and take practical steps to get out of debt.
Credit Counseling Certificate
If you are moving towards bankruptcy, you’ll typically need to complete a credit counseling course through an approved consumer credit counseling service. Once finished, you’ll receive a credit counseling certificate so that you can legally proceed with bankruptcy. This credit counseling certificate shows the court that you’ve attempted to solve your financial problems on your own.
Some credit counseling services offer extensive, thorough counseling to help you explore any potential problem areas when it comes to your relationship with money and learn techniques to address them. This often includes tailored advice on how you can start to manage money better. The counselor may go into great detail about the small things you need to change. Ideally, you’ll emerge with a new approach to managing money and credit.
Debt Management Plan
Not all credit counseling services offer payment plans, also called debt management plans (DMP). For many of them, though, this is their source of income. The process normally begins with the counselor negotiating with your creditors to reduce your payments and/or interest. You will normally pay one monthly payment — which will likely be less than the total of all the credit card payments you would otherwise have to make — that goes directly to the agency, before they distribute it among the applicable creditors.
This normally helps you pay off your creditors with less money and at a faster rate. However, these payment plans often come with a price. First, the credit counseling agency will likely charge a one-time processing fee of about $75, plus a monthly service fee of around $50 or more. Another cost is the potential damage to your credit rating. Although your rating shouldn’t be affected directly, creditors may leave a comment on your report that you used a credit counseling agency. Because this can be seen by other creditors, employers, or others who run your credit check, it can possibly cause you problems later on. Still, it is less likely to be a problem than a burdensome amount of debt.
Types Of Credit Counseling
There are a few different types of credit counseling agencies, some of which might be available as local offices. One is the nonprofit credit counseling agency. These are sometimes labeled as “free,” although they may charge up to $75 per month for the service. They provide financial education, counseling, and debt management plans.
For-profit debt settlement services offer a service that is similar to credit counseling services in that they will usually create a plan to help you pay back your debts. This program, however, normally does not provide counseling to help you learn how to manage your finances better.
Bankruptcy counseling focuses on preparing you for bankruptcy through financial education and counseling. You’ll usually get a certificate upon successfully completing the credit counseling course, which you’ll need to file chapter 7 or chapter 13. You may also need to complete a course after you’ve filed for bankruptcy.
The U.S. Department of Housing and Urban Development offers housing counseling (or mortgage counseling) to help assess your financial situation if you need help with your mortgage.
Tackling debt can be an intimidating venture. That said, with these options you have the opportunity to explore your past as it relates to credit, learn from your mistakes, and make the changes that will bring you financial stability.
Specific Credit Counseling Services
Below is a partial list of credit counseling services. It’s a good idea to check with the Better Business Bureau, read reviews, and ask the agency itself as many questions as possible. You can also verify with the National Foundation for Credit Counseling or another accrediting organization that the service is accredited where you are. Read any contract carefully before you sign it and watch out for excessive fees.
Money And Mental Health
A lot of us are tempted to say, “Money is just money,” and deny the ways in which it impacts our mood or other areas of life. However, money and mental health can interact with one another in many different ways. Some people may:
Of course, these are only some examples. And when it comes to scenarios like these or any others where finances are causing you stress, it’s also important to address your mental health.
Talking about money, mental health, relationships, and similar topics can feel vulnerable. When you see a mental health therapist or counselor, you have a safe space to address anything that is weighing on you, whether it’s related to finances or something else. A therapist is not only an unbiased third party, but they are someone with experience and education who can help you move forward and meet your goals.
You can see a therapist or counselor who practices near you, or you can go with an online therapy option such as BetterHelp. Online therapy platforms like BetterHelp often offer plans that are more affordable in comparison to in-person or face-to-face services, and financial aid to help with payments may be available. All you have to do to get started is take a quick questionnaire. Regardless of whether you choose to pursue online therapy or see someone close to your area, you deserve to find quality support.
A few additional questions people might have:
What does a credit counselor do?
A credit counselor will work to help you get out of debt. Depending on the counselor, they offer an initial counseling session that will cover their general services. They may offer services with certain fees, or they may offer a more general service. Credit counseling agencies employ credit counselors to help people better understand financial information, obtain debt relief, and move away from high fees, late fees, and a variety of things that are better to avoid when you have debt.
Don’t feel like staying in debt indefinitely is your only option. Debt counseling can be a great way to get free information, budgeting advice, free educational materials and workshops, and more.
What can I expect from a credit counselor?
If you have money problems, seeking certain services from a credit counselor can be a great idea. This can help you find better financial health by learning ways of managing debt. An initial session and then follow up sessions will enable you to set up a plan to pay off credit card debt via affordable monthly payments. Your credit counselor will help build your financial health and financial literacy, develop a payment schedule, understand monthly fees, and more.
All in all, a credit counselor’s job is to offer debt management services as well as other services that help people better manage credit and work to overcome it. They may help you refinance your debt and roll it all into one monthly payment, which can help simplify your life and get you on track to getting out of debt.
Do banks do credit counseling?
High fees, verbal promises, identity theft, monthly payments, credit card debt, credit card bills, unsecured debts, debt collectors—there is a significant amount of potential things to keep in mind when it comes to debt and credit. In general, you want to be wary of for profit companies when it comes to credit counseling agencies or a reputable credit counseling organization. Debt settlement companies are not all created equal, and it’s always a good idea to work with a certified credit counselor for an initial counseling session.
Your financial institution or bank may offer free educational materials and other help when it comes to money management and debt. If you can deposit money and have a workable budget, your bank may also have certain features to help you with debt management. In general, avoid organizations that do not work with a formal written agreement
How do I know if credit counseling is legitimate?
Credit counseling is more than simple money management or finding lower interest rates. It should be a holistic experience offered by a debt settlement company or debt settlement companies. You may be able to get all your debt refinanced into one monthly payment with lower interest rates than you had before. The United States government may also be able to provide credit counseling services. For example, there is the United States Trustee Program, which works with bankruptcy.
Frequently Asked Questions (FAQ)
When you enroll in a credit counseling program, that information will often show on your credit report for the entirety of your enrollment — as long as five years for some people. While this enrollment notation itself may not impact your credit score, certain aspects of your debt management plan could have implications on your score. For instance, if your credit counselor suggests you close an account, your available credit may shrink and change the credit utilization ratio used to calculate your overall credit score. If you’re concerned about whether actions taken as part of credit counseling will impact your credit, be sure to ask your counselor. It’s also a good idea to check your score before you begin counseling and throughout the process as you take steps to reduce your debt. This insight can help you understand how your score has changed over time and identify what you may be able to do to continue to improve it.
If you’ve accrued a large amount of debt and need help finding a path forward, credit counseling may be able to help. To decide whether it’s right for you, keep in mind that debt management plans are designed to help consumers reduce their credit card and personal debt. Student loans, mortgages, and auto loans cannot normally be included in a debt management plan. Another thing to remember is that although many credit counseling services are non-profits, this does not mean their services are provided for free.
Credit counselors are specially trained financial advisors who help people manage their debt. A credit counselor can guide you in setting up a budget and monthly payment plan while also teaching you how to better manage your finances.
It’s important to do your homework when it comes to choosing a credit counseling service. Once you’ve narrowed down your choices, the Federal Trade Commission (FTC) suggests you research each of the organizations through your state attorney general or a consumer protection agency in your area to ensure they are in good standing and no consumer complaints have been filed against them. On the FTC website, you can also find a list of questions the commission suggests asking prospective credit counselors before you decide with whom you’re going to work. Keep in mind that many credit counseling organizations are non-profits and reputable entities that should be able to provide basic information about services without asking for personal information or collecting a fee.
Most financial advisors will tell you that it is always better to pay off your debt in full if possible. Although settlement can be a step forward toward debt resolution, creditors will usually report the debt as “settled” to credit bureaus. This indicates that the account has been paid in full, but at a sum less than the full balance.
While credit counselors typically help eliminate your debt through smarter spending habits, debt settlement programs usually negotiate with creditors so you can pay a lump sum “settlement” to forgive your debt. This type of program typically requires you to set aside money each month into an escrow-like savings account that will go toward the settlement sum. The negotiated settlement sum is often less than the total debt owed, which can make it an attractive option to a consumer facing a large amount of debt. However, the Federal Trade Commission warns that debt settlement programs come with risks and in some cases can have negative financial consequences.
No matter what your financial circumstances, it takes time and patience to improve and rebuild credit. Unfortunately, there is no hard and fast rule that dictates how quickly one’s credit score will rebound. Although information about your participation in a credit counseling program will often show on your credit report, this notation is not likely to impact your credit score. However, the actions you take to settle your debts do have the potential to change your score. Remember that there are five areas that are factored into calculating your score (payment history, current debt, length of credit history, credit diversity, and recent credit applications).
Many non-profit financial credit counseling agencies are members of national associations, such as the National Foundation for Credit Counseling, which lay out specific requirements for membership. These requirements can be a way to help consumers feel confident working with a certified credit member agency. The National Foundation for Credit Counseling requires members to be a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code, trained and qualified in their state, in accordance with federal and state laws and regulations, accredited through the Council on Accreditation, and in compliance with other accreditation standards. For a list of National Foundation for Credit Counseling members near you, visit https://www.nfcc.org/agency-locator/.
If you own a small business, the National Foundation for Credit Counseling offers specific resources and assistance. The organization offers small business owners access to financial coaches who can establish goals to help their businesses remain on track. To learn more about how the National Foundation for Credit Counseling helps small business owners achieve financial success, visit https://www.nfcc.org/smallbusiness/.
The foundation also provides personalized services for members of the military and veterans. Certified counselors can help members of the military and veterans create a plan to get out of debt, and free online calculators allow you to estimate how long it will take to pay off your credit card(s). The National Foundation for Credit Counseling also offers tips to help members of the military and veterans manage their finances.
Debt consolidation is a way to combine multiple debts into one larger debt. Put another way, debt consolidation requires you to take out a new loan to pay off others. In some circumstances, the debt consolidation process results in a lower, more competitive overall interest rate; and it can be convenient because it means you will only have to service one loan rather than many.
There are some disadvantages when it comes to debt consolidation. To start, it’s important to remember that debt consolidation alone does not prevent you from ending up in future debt. And perhaps the most significant downside of debt consolidation is the possibility that it may not save money. For instance, the consolidation loan could come with an interest rate higher than your existing interest rates, which means that over time you might end up paying significantly more. Another thing to consider is the amount of fees associated with some debt consolidation loans (closing costs, transfer fees, etc.). It can also be a choice that’s less than ideal if you are in a position where, after taking out the loan, you continue to use your credit card frequently without the means to pay it down.
Beyond the possibility of a high-interest debt consolidation loan for those with poor credit, it’s likely your credit score will drop slightly. Consider using a debt consolidation calculator to see how a debt consolidation loan might affect your financial goals and whether it is right for you. Additionally, if you continue to overspend and don’t address the underlying issue, your debt can build up again. This is part of why getting a trusted third party involved can be both a favorable move and the start of true relief for many people.