Credit Counseling


Is Consumer Credit Counseling Right for You?

The Bottom Line: Consumer Credit Counseling programs are one of the more popular debt relief options available. Credit Counseling is a smart choice if high interest credit cards are a big problem, provided your creditor(s) work with the program. You can reduce the total cost to pay off your debt, get out of debt in 4 to 5 years, and avoid having any accounts go to collections. Be sure you can afford the monthly payment. Your success in completing the program requires you to make timely monthly payments that may be comparable to your current monthly minimum credit card payments.

Consumer Credit Counseling firms help millions of Americans each year who struggle with debt.

If you have more than $5,000 in unsecured debts, credit counseling could be the right solution for you.

One important benefit of working with a credit counseling firm is it includes a free financial review and budgeting assistance.  A counselor will go over your total household income and expenses, so you can figure out how much money need to put toward your fixed living expenses and how much you can devote to paying down your debts.

You will go over your individual debts, to determine which can be included in any Debt Management Plan the Credit Counselor recommends.

What Debts Are Accepted?

Not all of your debts are eligible for a credit counseling program. The most common eligible accounts are:

  • Credit Cards
  • Store Charge Cards
  • Unsecured Personal Loans

Medical debts may be accepted, but the only way to find out if your specific medical debts can be enrolled is to provide a complete list of all outstanding debt.

Think carefully whether you have any debts that don’t appear on your credit report. Don’t omit anything, as you want to clear out all your debt.

Check with your Credit Counseling provider to see if they accept accounts that have gone into collection. Whether your account is still owned by your original creditor and how delinquent it is can affect whether you can enroll the debt.

Ineligible Debts

You generally can’t include the following debts in your program:

  • Student Loan Debt
  • Secured Debts- Auto Loan or Mortgages
  • Utility Bills
  • Cellphone Accounts

Credit Counseling Benefits

The biggest benefits of a Credit Counseling Debt Management Plan are that it can get you out of debt faster and at a lower cost. The DMP will put in place interest rates that are available only through the program. If you have high interest rates, the DMP can often lower your rates significantly, so more of your money is going to principal each month.

DMPs run about 4-5 years. If you are stuck in the trap of making only the minimum payment that’s required each month, the 4-5 years will take a lot less time to pay off all your debt than working the problem on your own.

A DMP gives you the convenience of sending in just one monthly payment to pay off all your debt. The program is fixed; if you make the monthly payment each month for the number of months your program runs, you will clear out all debt you enroll.

Another great benefit of credit counseling is that it can stop collection calls. If you are already behind on your payments, aggressive collection calls can cause a lot of stress. Credit counseling puts an end to that.

The program may be able to get some late fees or other penalties removed.

Each month, you will still receive monthly statements from your creditors, so you can monitor your progress with first-hand information from your creditors.

Credit Counseling Disadvantages

There are three main disadvantages to a credit counseling Debt Management Programs:

  1. High Dropout Rate. Less than 1 in 4 people who enroll in a DMP finish the plan and exit paying off all their enrolled debt.
  2. The size of your monthly payment. Your monthly cost in the DMP will likely be almost as high as the payments you are making to your creditors on your own. If you are struggling to make those payments, don’t let your desire to put the problem behind you, lead you to commit to a payment you can’t make each month. You can’t skip payments in a DMP without risking the program falling apart.
  3. Effect on Your Credit. DMPs require that you close your accounts to enroll them. That harms your credit score by lowering your credit utilization. Every account enrolled in a DMP has a special notation on your credit report. Because the notation makes clear that you are using a third party to help you resolve your debt, many lenders will view you like a person who filed for a Chapter 13 bankruptcy.

Credit Counseling Shopping Tips

Here are six important areas to focus on, so you find the best credit counseling firm to help you.

  1. Fees- You may have to pay an enrollment fee as well as a monthly service fee. Fees are capped by the state in which you live and vary from state to state. Shop around to compare costs.
  2. Voluntary Contribution- Some credit counseling services request a “voluntary contribution.” This can be a way to get around the fee cap that your state has in place. If you are asked to contribute, choose not to! Be wary of any firm that asks for a voluntary contribution.
  3. Total Costs- Get a detailed price quote in writing, before you make any commitment! You should know what your interest rates will be on all the debts you enroll, the size of your required monthly payment, and exactly how long it will take you to pay off your debts.
  4. Credentials- Verify that the firm is licensed to operate in your state. Are the individual counselors certified by a reputable outside organization?
  5. Affordability- Make sure that you can afford your required monthly payment. Consumers dropping out because they can’t afford to make the payment is the number one reason that credit counseling program fail. If you aren’t confident that you can make the payment each month, look at alternatives such as debt settlement and bankruptcy.
  6. Contract- Only work with a firm that has you sign a formal contract. Be sure that the written terms are consistent with any representations they made on the phone or in person.