Credit Counseling: Finding A Way Out Of Debt
Lines of credit, unsecured loans, and credit cards can be beautiful, but what does IPC stand for? How else can you buy nearly anything you need without having money to pay for it? You might use an unsecured line of credit for home maintenance, a loan to pay for a vacation or a credit card for everyday purchases. Mostly, these are convenient, socially acceptable options that are often useful in a pinch. However, they can come with severe consequences if not managed carefully.
Below we’ll look at debt, credit counseling agencies, debt management, and the best credit counseling services to get out of debt and move toward a healthy 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. Many people who go into debt do so out of necessity. For example, young adults may take out a student loan to pursue higher education with the hope of securing a better future. In addition, many people may open a new credit card to pay for various life expenses like food and clothes.
At first, you may have gotten an unsecured credit card because your parents or mentor say you should. They may have told you that it will build your credit history or be helpful in emergencies. Perhaps you didn’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 you can continue using credit cards to get things you need or want when you don’t have the cash to buy them. This can lead to overspending or treating yourself when you don’t have the funds. The purchases might seem small, but they can add up.
Then, unexpected life events happen. Maybe your budget is tighter than usual one month because of an unexpected expense. You might decide to pay the minimum, so you pay $25 even though you’ve spent $250. This seems like a great deal, so maybe you continue along this path. When your first credit card is filled with charges, you apply for another credit card, which eventually reaches its credit limit. This can lead to increased credit card debt and a strained relationship with your credit card issuer.
Worse, your financial situation might change. Having and maintaining lower interest rates requires discipline. 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 the situation. However, interest rates and payments show up, leaving you with more expenses than you might’ve ever had before larger credit card bills, and not enough money to catch up. In the end, getting in over your head can be easy.
Many places offer quick fixes for excessive debt, but it's important to differentiate between genuine debt counseling services and those that merely claim to assist. Some counseling services are often accompanied by high-interest rates, which can lead to more debt. More debt may affect your credit score negatively and leave you with another payment to make for years to come.
If any of this resonates with you, a possible solution you may not have considered is credit or debit counseling. It typically takes time and patience, but it can give you strategies and skills to set you up for an improved financial future.
Can you fix your debt problems alone?
While some people can fix their debt problems independently, many 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 willingness to study, 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 be accountable to besides yourself. You might need someone to help you explore your motivations for overspending and ways to manage your debt and finances. Also, if you aren’t accustomed to negotiating for yourself, it can be helpful to have someone with more experience doing it for you. For all these reasons, credit counseling agencies can be handy resources.
How can credit counseling services help?
Credit counseling services may help you get out of debt and into financial stability. 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 challenging. However, if you follow your credit counseling agency's plan, the problem often becomes much more manageable.
What exactly is a consumer credit counseling service?
First, consumer credit counseling is a specific type that primarily focuses on your attitudes toward money and credit. It 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 recommendations, including insights into money management, based on your unique situation and formulate a personalized plan. Finally, some consumer credit counseling and other services help negotiate with and pay 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 several reasons. It might be the first time you ask for use 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 may make you feel nervous. However, credit counseling services may help you see the whole picture and make informed steps, leading to better outcomes and making you feel more at ease.
How credit counseling works
Generally, consumer credit counseling doesn’t necessarily provide a quick fix. You may still pay the credit counseling agency a year or more from the start. And even with a 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.
Usually, you’ll start with an intake interview. Many credit counseling organizations allow potential clients to participate in a free consultation with a certified debt specialist or certified credit counselor. Before the interview, you may need to gather bills, income statements, and pay stubs. You'll usually go over all these figures during this first meeting with your credit counselor. During your initial counseling session, The counselor may ask questions to determine how you view money and credit and how your debt affects 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 commit to the service so that you will not incur any more debt. This often means no more new credit cards, no new unsecured loans, and 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 to make the credit counseling venture successful. You may have practice exercises to help you work on budgeting and 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 toward bankruptcy, you’ll typically need to complete a credit counseling course through an approved consumer credit counseling service. Once finished, you’ll likely receive a credit counseling certificate to proceed with bankruptcy legally. This credit counseling certificate shows the court that you’ve attempted to solve your financial problems independently.
Some offer various services, such as credit or student loan counseling, and help you create a debt management plan. They may also help you explore potential problems regarding your relationship with money and learn techniques to address them. This often includes tailored advice on how to manage money better. The counselor may go into great detail about the small things you need to change. Ideally, you’ll develop a new approach to managing cash 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 typically begins with the counselor negotiating with creditors to reduce your payments and interest. You will typically pay one monthly payment — which will likely be less than the total of all the credit card payments you would otherwise have to make. This payment goes directly to the agency before distributing the money among the applicable creditors.
This usually 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 cause problems later on. Still, it is less likely to be a problem than a burdensome debt.
Types of credit counseling
There are several types of credit counseling agencies, some of which might be available at local offices. One type 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 tend to provide financial education, counseling, and debt management plans.
For-profit debt settlement services are similar to credit counseling services in that they usually create a plan to help you pay back your debts. A debt settlement company, however, may not provide counseling to help you learn how to manage your finances better. Often, debt settlement services charge a monthly maintenance fee as well as a setup fee. When researching plans, you may want to contact services directly to find out what their average monthly fee is. The best credit counseling services for you will typically depend on the type of debt you have. Below are some of the different types of debt counseling services available.
Bankruptcy counseling focuses on preparing you for bankruptcy through financial education and counseling. You’ll likely get a certificate upon completing the credit counseling course, which you’ll need to file in chapters 7 or 13. You may also need to complete a period after you’ve filed bankruptcy cases. Many organizations, such as GreenPath Financial Wellness, provide discounted bankruptcy counseling for some clients. You can also find online bankruptcy counseling through services like InCharge Debt Solutions.
Student loan counseling
For those who have taken on loans to pay for school, student loan counseling can provide help with this specific type of debt. Student loan counseling services can help students navigate their loans, learn about personal finance, and achieve their financial goals. For example, Cambridge Credit Counseling Corp (one of the top credit counseling services) can help facilitate student loan debt consolidation and help clients opt in to programs that will lower their monthly payments.
Finally, the U.S. Department of Housing and Urban Development (HUD)offers housing counseling (or mortgage counseling) to help assess your financial situation if you need help with your mortgage. There are also several organizations that offer housing counseling. For example, Money Management International is a non-profit that can provide guidance if you’re experiencing financial hardship after purchasing a home or looking for help with a specific concern (e.g., reverse mortgage counseling).
There are other forms of debt counseling that may be helpful in specific situations (e.g., disaster recovery counseling). Tackling debt, whether it's related to school student loans or other commitments, can be an intimidating venture. With these options, you can explore your past as it relates to credit, learn from your mistakes, and make changes that can bring you financial stability.
Best debt counseling services
Below is a partial list of some of the best debt counseling services available. If you’d like a tailored list of counseling and debt management services, resources like the Financial Counseling Association of America can help you narrow your search. To ensure you limit your search to reputable credit counseling agencies, It’s a good idea to check with the Better Business Bureau, read reviews, and ask each agency itself as many questions as possible. You can also verify with the National Foundation for Credit Counseling or another accrediting organization that each service is accredited where you are. Also, you might read any contract carefully before you sign it and watch out for excessive sign-up or monthly fees.
American Consumer Credit Counseling
- Provides: Credit counseling, debt management plans
- Fees: Budget counseling: free; initial fee for DMP: $39; monthly fee for DMP: $5 per account up to $35
- Contact Address: 130 Rumford Ave., Suite 202, Auburndale, MA 02466-1371
- Phone: (800) 769-3571
Abacus Credit Counseling
- Provides: Bankruptcy courses
- Fees: Bankruptcy pre-filing course: $25; post-filing course: $35
- Contact Address: 15760 Ventura Boulevard, Suite 700, Encino, CA 91436
- Phone (800) 516-3834
Cambridge Credit Counseling
- Provides: Credit counseling, debt management plans, bankruptcy counseling
- Fees: Credit counseling and debt analysis: free; initial fee for DMP: up to $75; monthly fee for DMP: up to $50
- Contact Address: 245 Saw Mill River Road, Hawthorne, NY 10532
- Phone: (888) 656-4396
Clearpoint Credit Counseling Solutions
- Provides: Credit counseling, debt management plans
- Fees: Budget and credit counseling: free; DMP: set by the state, up to $50
- Contact Address: 270 Peachtree Street NW, Atlanta, GA 30303
- Phone: (800) 750-2227
Pioneer Credit Counseling
- Provides: Financial counseling, debt management plans
- Fees: Budgeting and financial counseling: free; DMP: $5 to $50 per month, depending on the number of creditors and amounts owed
- Contact Address: 1644 Concourse Drive, Rapid City, SD 57703
- Phone: (800) 888-1596
First BK Credit Counseling
- Provides: Pre- and post-filing courses for bankruptcy
- Fees: Bankruptcy pre-filing course: $14.95; post-filing course: $9.95
- Contact email: email@example.com
- Phone: (844) 399-0377
Advantage Credit Counseling
- Provides: Credit counseling, debt management plans
- Fees: Budgeting and credit counseling: free; DMP initial fee: $50; monthly payment: $5 to $50, depending on the number of creditors
- Contact: 2403 Sidney Street, Suite 400, Pittsburgh, PA 15203
- Phone: (866) 699-2227
Delray Credit Counseling
- Provides: Credit counseling, debt management plans
- Fees: Financial counseling and education: free
- Contact Address: 5300 W. Atlantic Ave., Suite 200, Delray Beach, FL 33484
- Phone: (800) 982-8445
ACC Credit Counseling
- Provides: Credit counseling and education (does not offer debt management plans), bankruptcy courses
- Fees: Counseling and education services: free; bankruptcy pre-filing course: $25, post-filing course: $15
- Contact Address: 633 W 5th Street, Suite 26001, Los Angeles, CA 90071
- Phone: (800) 205-9297
Money and mental health
Financial matters can affect much more than just your credit rating and spending power. Money and mental health can interact with one another in many different ways. Some people may:
- Have difficulty with impulsivity, leading to impulsive spending.
- Experience pervasive stress related to money, which can affect family life or romantic partnerships, impact your physical health and sleep, or contribute to symptoms of depression and anxiety.
- Feel shame or embarrassment related to money.
- Have deep-rooted financial concerns.
These are only some examples. When it comes to scenarios like these or any others where finances are causing stress, it can also be helpful to address your mental health.
When handling the stress involved with financial concerns, you don’t have to face them alone. Aside from credit counselors, you can talk to a licensed therapist as you navigate this process. When you see a mental health therapist or counselor, you have a safe space to address anything weighing on you, whether it’s related to finances or something else.
If you are uncomfortable visiting a therapist’s office, you might try online therapy, which research has shown to be just as effective as traditional in-person therapy. With an online therapy service like BetterHelp, you have the benefit of talking to a therapist from the comfort of your home or anywhere with an internet connection. Also, online therapy tends to be more affordable than in-person therapy without insurance.
If you are experiencing debt-related stress, know that help is available. There are credit counselors trained to help you get out of debt and move forward with your life. Also, you can talk to a licensed therapist as you navigate the emotional process of tackling your debt and building a healthy future.
You can see a therapist in person or use an online therapy option, such as BetterHelp. BetterHelp has an affordable subscription plan in addition to offering financial aid to those who qualify. All you have to do to get started is take a quick questionnaire. Take the first step today.
What Does A Credit Counselor Do?
A credit counselor typically works to help you get out of debt. Depending on the counselor, they may 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 payments, late fees, and a variety of problems 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 an effective 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 valuable option. This can help you find better financial health by learning ways of managing debt. An initial session and then follow-up sessions might enable you to set up a plan to pay off credit card debt via affordable monthly payments. Your credit counselor may be able to help you build your financial health and financial literacy, develop a payment schedule, and understand monthly fees.
All in all, a credit counselor’s job is usually to offer debt management services as well as other services that help people better manage credit and work to overcome debt. 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 agent—there is a lot to keep in mind when it comes to debt and credit. In general, you might be wary of for-profit companies when it comes to credit counseling agencies. Debt settlement companies are not all created equal, and it’s 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, you might want to 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 simply providing money management tips or finding lower interest rates. It tends to be a holistic experience offered by a debt settlement company. 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 individuals facing bankruptcy.
Is Credit Counseling Bad For Your Credit?
When you enroll in a credit counseling program, that information will often show up 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, you can ask your counselor. It may also help 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.
Is Credit Counseling A Good Idea?
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.
What Does A Credit Counselor Do?
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.
Who Is The Best Credit Counseling Service?
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 safety 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 provide basic information about services without asking for personal details or acquiring a fee.
Is It Better To Pay Off A Debt Or Settle?
Most financial advisors will tell you that it is better to pay off your debt in full if possible. Although settlement can be a step forward toward debt resolution, creditors 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.
What Is The Difference Between Credit Counseling And Debt Settlement?
While credit counselors typically help with advice for smarter spending habits, debt settlement programs usually negotiate with creditors so that you can pay a lump sum “settlement” to have your debt forgiven. 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.
How Long Does It Take To Improve A Credit Score After Debt Settlement?
No matter what your financial circumstances are, it usually 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 likely appear 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.
What Is The Best Non-Profit Debt Consolidation Agency?
Many non-profit financial credit counseling agencies are participants of national associations, such as the National Foundation for Credit Counseling, which lays out specific requirements for admission. The National Foundation for Credit Counseling requires participants to be a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code. They must also be trained and qualified in their state, work in accordance with federal and state laws and control, hold accreditation through the Council on Accreditation, and be in complaisance with other accreditation standards. For a list of National Foundation for Credit Counseling groups near you, visit 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 connection 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 www.nfcc.org/smallbusiness.
The foundation also provides personalized services for participants of the military and veterans. Certified counselors can help participants of the military and veterans create a plan to get out of debt, and free online calculators allow them to estimate how long it will take to pay off credit card debt. The National Foundation for Credit Counseling also offers tips to help participants of the military and veterans manage their finances.
Why Would A Borrower Choose To Consolidate Debt?
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 pay one loan rather than many.
What Are The Disadvantages Of Debt Consolidation?
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. Also, 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.
Further, it’s important to consider 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.
What Are Other Risks Of Debt Consolidation?
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 mediator involved can be both a favorable move and the start of true relief for many people.
- Previous Article
- Next Article