Credit Counseling: How it Works & How to Select an Agency

on Credit Counseling

Credit Counseling: How it Works & How to Select an Agency

Credit counseling is an excellent tool to help you take control of your finances. Regardless of your financial situation, credit counseling can lay out the roadmap you need to get the most out of your money. Here, we explain what credit counseling is, how it works, and how to select the right agency for you.

What is Credit Counseling?

Credit counseling is a resource to help you manage your money. Through credit counseling, you can find support to organize your finances, pay down your debt, and save for the future. Consumers can work directly with a credit counselor to get assistance in building a realistic and feasible budget. Money management workshops are another resource provided through credit counseling.

In credit counseling, a counselor works directly with the consumer to evaluate financial health and recommend services to address any issues. Credit counseling agencies offer tools to help you stick with your budget, avoid late payments, and help you get the most of your savings. Counselors may also recommend a debt management plan, debt consolidation, debt settlement programs, or bankruptcy to consumers with outstanding debt.

Consumers looking to evaluate their finances can benefit from credit counseling. It provides effective solutions for improving your individual financial situation. According to the National Foundation for Credit Counseling, nearly 70% of the reported 1.2 million consumers enrolled in debt management plans either paid off their debt in less than five years or were on track to do so.

How does Credit Counseling Work?

Credit counseling helps you navigate your finances. A counselor evaluates your finances, considers your financial goals, and recommends service or helps you develop a game plan to control your money. Credit counselors can help you overcome financial hardships by directing you to the best option available for your situation.

The first step is the interview process. To provide personalized solutions, a credit counselor needs to fully understand your financial situation. Be prepared to share your income, expenses, investments, and long-term goals with your counselor. This helps your counselor accurately assess your financial health by understanding how you currently manage debt and what kind of cash flow you have to work with.

Preparing for your interview: It is important to be able to answer any questions your counselor may have. Make sure you know your total income, outstanding debt, and monthly expenses. It is a good idea to have access to your most recent paycheck from each source of income you have. Also, you need to know the details of your expenses. Interest rates, loan terms, and due dates are all key factors that your credit counselor will need to know to make the best recommendation. If your monthly expenses fluctuate, like your utility bill amount changes from month-to-month, providing an estimate of the monthly bill is acceptable. Just make sure you are able to accurately account for where you spend your money each month.

Once your credit counselor has a clear picture of your situation, he or she will be able to make recommendations about budgeting, repayment strategies, and direct you to other resources as needed. Credit counseling can help you avoid financial trouble by bringing your attention to areas in need of improvement. You can also learn about your credit score, your best options for handling large expenses, and how to improve your overall financial health.

What will my Credit Counselor Recommend?

Your credit counselor may help you develop a budget that you can stick with. If you have long-term goals financial goals like buying a house or taking a vacation, your credit counselor can help you get a copy of your credit report and give you advice on how to improve any numbers that need work. Free educational materials and workshops are often another component of credit counseling.

If you struggle with outstanding debt, your credit counselor will help you create a debt management plan. This usually entails making a single payment to the credit counseling organization each month or pay period from which the organization will make monthly payments to each of your creditors on your behalf. Your counselor may be able to lower your overall monthly payment by negotiating extensions for the repayment period or asking your creditors to lower interest rates or waive certain fees. However, debt repayment under a debt management plan typically does not result in any negotiated reduction to the overall balance owed.

What about my Credit Score? 

Good news: Credit counseling generally will not affect your credit score; however, if you participate in a program offered by your credit counseling agency, you will likely pay off outstanding debt which will positively affect your score. If you are enrolled in a debt management plan, this may be reflected in your credit history. But, if you pay your debt timely and in full, it will likely not impact your score.

It is important to keep in mind that when a debt is settled for less than what is owed through debt settlement, this can be reported and negatively impact your credit score.

Which Agency is The Right One for Me?

There are a lot of credit counseling agencies out there, so do your research and try to avoid feeling overwhelmed in selecting the right one for you. Ask friends and family for recommendations or check out the Financial Counseling Association of America’s website or the National Foundation for Credit Counseling. Choose a few organizations for further consideration, then look them up with your state attorney general or through your state consumer protection agency.

What to Look for:

  • Free Information: You should be able to get free information about a credit counseling agency without having to provide any details about your finances. If an agency will not provide you information with you disclosing specifics about your situation, this is a red flag.
  • Agency Specifics: Ask what services the agency offers, if it offers credit counseling online or in person, what fees are associated with their services, what the counselors’ qualifications are, and how employees are paid.
  • Accreditation: Make sure the agency and its counselors are accredited by the National Foundation for Credit Counseling. This likely means it is also a non-profit agency and is subject to strict state and organizational guidelines and is frequently audited to ensure the agency and its counselors act in the consumers’ best interest.
  • Protect yourself: Make sure you have everything in writing. Having documentation of the fees, services, program duration, and cancellation options is not only a good resource for answering questions that may come up later, but it is also good practice to have written proof of everything that was agreed to.

Whether you are looking to improve your financial situation or you are just looking for reassurance that you are on the right track, credit counseling is a great resource to answer your questions, provide advice, and get you connected with services you need to reach your financial goals. Do your research and find the right credit counseling agency to meet your needs.