Most Americans use credit, and sometimes the use of credit can get a little out of hand. When this happens, getting help from a professional can get you back on track. But how do you know if credit counseling is right for you, and how do you know that the credit counselor is legit and not going to waste your time and money?
I’ve been doing some research into credit counseling, and I learned a lot of interesting things. There are definitely legitimate, honest credit counseling agencies that provide positive results for their clients. If you’re struggling with credit card debt, a good credit counseling agency can help you in many ways.
Before reading on, I want to make it clear that I am talking about two different types of programs that are generally offered by the same organizations. Step one is credit counseling, which is usually a free, one-time overview of your debt situation where you make a plan to pay off debt. Step two is debt management, where you have an ongoing relationship with your credit counseling provider to help you take the steps to pay off the debt. Unfortunately, both services fall under the broader heading of “credit counseling,” but the first step is also called credit counseling. It can be confusing.
Who Can Benefit From Credit Counseling?
You’re probably a great candidate for credit counseling services if:
- your unsecured (credit card and personal loan) debt is keeping you up at night, or
- you are paying out 20% of your monthly take-home pay toward unsecured debt payments, or
- you are having trouble making payments on your debts.
Read more about the pros and cons below to see if you are comfortable with it. If you think you’d like to proceed, but you’re not sure, you can always call and have a telephone conversation with a counselor. A reputable credit counseling service will never pressure you into taking their services.
What Are The Benefits of Credit Counseling?
Credit counseling can help you objectively organize your debt and create a plan to pay it off. Having a professional help you gather information and educate you about decisions results in better choices and more success.
Depending on how much help you need, credit counseling can provide:
- peace of mind that you are making smart choices,
- a solid plan for paying off debt,
- reduced interest rates and waived late fees and penalties,
- help managing your payments for maximum benefits.
What Are The Downsides of Credit Counseling?
For basic credit counseling, I really can’t see a downside.
If you move to the higher debt management programs, there are some things to consider.
First, you will be asked to close all your accounts.
Second, debt management programs do have associated costs. Details vary by state because credit counseling services are pretty regulated, but costs are never higher than $35 per month set-up fee and $50 per month management fees. These fees pay for the staff to help you negotiate with your creditors, and the ongoing management of your payment. Many customers find that they save more on lower interest and waived fees than they pay in debt management fees.
Also, if you participate in a debt management program, some creditors may report this information to the credit reporting agencies. It shouldn’t lower your credit score itself, but someone reviewing your report may see this notation. How it is interpreted is completely up to the lender. Some lenders like to see that potential customers have proactively worked with a debt management program because they think it shows responsibility. Other lenders may be concerned because you accrued too much debt in the past and wonder if you will do the same thing again.
How To Spot A Scam
Unfortunately, there are plenty of companies who just want to take your money. Avoid companies who:
- Promise fast results.
- Say they’ll make your debt go away.
- Ask you to pay them a large up-front fee for their services.
- Pressure you to sign up.
Just because a credit counselor is a “non-profit” does not necessarily mean that they are good; there are many ways for individuals to make money off the non-profits that they run. You want to look for accreditation by the National Federation of Credit Counselors (NFCC) and an excellent rating by the Better Business Bureau.
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