Credit counseling is a service designed to educate consumers about how to pay off their debts, and stay out of debt. Credit counseling will usually involve the person who needs counseling gathering all their bills and credit card statements together to analyze their situation with the help of a counselor, and come up with a structured plan to pay down the debt.
Counseling will also usually involve education about money management, such as budgeting and saving, so people can stay out of debt and even start to grow wealth.
Who Is Credit Counseling Intended For?
Credit counseling is intended for anyone who wants to:
* Pay off debt
* Repair their credit score
* Learn how to manage their finances more effectively so they can remain free of debt
Statistics show that around 50% of Americans don’t have a working budget. Therefore, most adults at any income level can benefit from credit counseling.
Many non-profit companies offer free or cheap counseling services. And if you are thinking of filing for bankruptcy, credit counseling is mandatory before and after (if you are allowed to file).
Credit counseling may sound complicated, but investing a few hours of your time in it could lead to huge savings and a great credit score.
Understanding Credit Counseling
Reputable credit counseling organizations employ trained and certified staff. These counselors can talk with clients to help them develop a personalized plan for their credit issues. An initial counseling session typically lasts one hour, with an offer of follow-up sessions. A reputable agency should offer information about its services free of charge without requiring potential clients to disclose details about their situation.
Credit counseling companies can help you create a debt management plan (DMP), which allows you to make a single payment toward your debt each month. Under a DMP plan, the consumer deposits money each month into an account within the credit counseling organization. The organization uses the funds to pay unsecured debt, such as credit card bills, student loans, and medical bills.
These debt payments follow a schedule the counselor and consumer develop together. Often, creditors will need to agree to the scheduled repayment plan. Creditors may decide to lower interest rates or waive fees. A successful DMP requires regular, timely payments. It may take 48 months or more to complete a debt management plan.2
It’s important to note that credit counseling and agencies that provide these services are not the same as companies that offer debt settlement or debt consolidation services. Debt settlement involves the negotiation of a reduction in the total amount of debt owed. This is something you can do on your own or hire a debt settlement company, which typically involves a fee. Debt settlement can help you eliminate debts for less than what’s owed and avoid bankruptcy, though it can have negative consequences for your credit score.
Debt consolidation is a process in which you take out a consolidation loan to pay off all of your existing debts. You’d then make payments toward the new loan going forward, according to the interest rate and terms set by the lender. This method doesn’t allow you to pay less than what’s owed toward your debt but it can make repaying what you owe more streamlined and convenient.
Can Credit Counseling Help Me Get Out of Debt?
Credit counseling can help with getting out of debt, depending on your situation and your needs. If you’re struggling to come up with a realistic budget, for example, a credit counselor can review your spending and income and help you identify areas where you could improve and create more money to apply to debt repayment.
A credit counselor can also discuss debt repayment strategies to help you choose a method that works best for you. For example, they may help you weigh the merits of the debt snowball method versus the debt avalanche. Both methods require you to prioritize your debts and pay as much money toward the first one as possible while paying the minimum to the rest of your debts.
Where they differ lies in how you order your debts. With the debt avalanche, you pay off debts from the highest interest rate to the lowest. This method can help you save money on interest over time. With the debt snowball, you pay off debts from the lowest balance to the highest. You may not save as much on interest but you can get motivated to keep paying down debt if you’re able to clear one or two balances relatively quickly.