What Is Credit Counseling and How Does It Work?
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Spending more than you earn can result in large amounts of debt that can be difficult to manage and nearly impossible to pay off without help. Fortunately, several resources are available to help people struggling financially get back on their feet and start working toward a brighter financial future.
One of the most important things you can do to improve your financial situation is to seek the services of a qualified credit counselor who can help you develop a personalized plan for managing your debt, money management, and reducing your living expenses so you can set yourself on the path to financial freedom. These professionals can help you determine the best strategies for paying down your debts and managing your budget to take control of your finances and begin working toward a more financially secure future.
In this article
What is credit counseling?
If you've ever had financial difficulties or are concerned that you might run into financial trouble in the future, credit counseling might be just what you need to get your personal finances back on track. The goal of credit counseling is to provide you with the financial guidance you need to take control of your finances and help you manage your finances in a way that will help you and improve your overall financial health.
Good credit counseling services:
- Work with you to develop a plan for improving your credit score and managing your debt.
- Help you understand your credit report and identify areas you can work on to help improve your score. You'll also receive educational materials and other resources to help you stay on track and improve your financial literacy.
- Provide advice to help avoid mistakes so you can make smarter choices that benefit you.
- Help you develop a budget and make informed spending decisions to get out of debt faster.
- Offer a litany of services, including bankruptcy counseling and debt counseling.
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In addition to helping you develop a sound financial plan for managing your money, your credit counselor can also help you identify any potential red flags for fraud or identity theft so you can take steps to protect yourself from scammers and other unscrupulous individuals.
A vast majority of credit counseling organizations are nonprofit organizations. The National Foundation for Credit Counseling is one of the oldest networks of nonprofit financial counseling agencies in the U.S. Each NFCC member agency has to obtain and maintain accreditation by the Council on Accreditation (COA).
What does a credit counseling session look like?
Before you begin working with a counselor, it's a good idea to get a clear picture of where you stand in terms of your current financial situation. Make a list of all your debts and the amounts owed on each account so you can have a clear picture of how much you owe and how much you need to pay each month to start progressing toward paying off your debts.
Once you have calculated your monthly payments for all of your debt accounts, add them together to calculate your total monthly debt payments, which will give you an idea of how much you have left in your monthly budget after you've paid your creditors. You can use this figure as a starting point for developing a budget for your expenses and determining how much you can afford to spend on things like food and utilities while still meeting your other financial obligations and setting aside money for savings and other financial goals. This information will help you when you meet with a credit counselor.
The session
The first step in the process is to fill out an application with a reputable credit counseling agency. Most credit counseling agencies will require you to complete a comprehensive financial assessment before they can help develop a personalized plan to help you manage your money more effectively and get out of debt once and for all.
Once you've completed your application and submitted it to the credit counseling agency of your choice, you'll be asked to attend an introductory meeting with a counselor to discuss your current financial situation and the goals that you have for yourself and your family going forward. During this meeting, your counselor will work with you to create a personalized plan for managing your money and getting out of debt based on your specific needs and goals.
Your counselor will also be available to answer any questions you might have about your financial situation or credit counseling in general and provide you with the resources you need to take charge of your finances and make a plan to start building a healthier financial future. Credit counseling is an important step that can help you eliminate your debts and establish a solid financial plan that allows you to take control of your finances and focus on achieving your long-term financial goals.
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How to find the right credit counseling agency?
You should begin by browsing Financial Counseling Association of America and the NFCC's websites. Ideally, you should look for a nonprofit credit counseling agency instead of a for-profit one, which is an NFCC member agency. This company should have experience helping people with financial problems like yours, has been in business for a few years at least, and has a proven track record of success.
Once you've arrived at your agency of choice, you should wear your detective hat on and check them out with the state attorney general and the state consumer protection agency. It's also a good idea to look it up on the Better Business Bureau's website. The goal is to ensure that the agency you've chosen is legit and not a scam. Here's a telltale sign to spot a scam: a legit agency will provide you for free a list of all of its services without asking you to provide any details about your financial situation.
When looking for a credit counseling agency, you should look for one that:
- Offers services like budgeting and financial education on managing your spending and debt.
- Offers its services over the phone, online or in-person, starting with an initial counseling session that takes about an hour.
- Is always upfront about any fees they'll charge.
- Has accredited or certified counselors who have either a certified financial planner license, certified public accountant license, chartered financial analyst license, or certified credit counselor license.
- Puts everything in writing.
- Is accredited, i.e., an NFCC or FCAA member.
Benefits of working with a credit counselor
- Personalized approach: Credit counselors don't have a one-size-fits-all approach when it comes to debt relief. The reason they hold an initial counseling session is to get a better understanding of your finances. That information is then used to develop a personalized plan for you.
- Support system: Your credit counselor will be there for you every step. If there are any hiccups in your plan, they'll sort that out, so you never go off track and lose sight of the end goal. Your counselor will help you meet your goals and support you need to succeed.
- Lesson learned: As the old adage goes, experience is the best teacher. No matter how much personal finance content you consume, going through a particular situation teaches you more. Once you've graduated from the program, you'll be armed with best practices to ensure you never repeat the same mistakes.
- They do all the heavy lifting: From obtaining a copy of your credit report to aiding in planning a budget to providing sound financial advice, including a debt repayment strategy, credit counselors do a lot for you.
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Does credit counseling hurt credit scores?
Understanding your credit score can help improve your financial standing and make smart financial decisions in the future. Your credit score is based on several factors, including your payment history, the amount of debt you have, and other factors, such as your income and employment history. The higher your credit score is, the more favorable your interest rates will be with a lender. And credit counseling can help in this regard.
A credit counselor can work with you to create a plan for improving your credit and helping you pay off your debts. That said, your score may temporarily dip depending on the solution offered by the counselor. However, in the long run, your credit score will improve. Common debt relief options offered by credit counseling agencies include debt management plans and debt settlement, which will hurt your score. On the other hand, a debt consolidation loan doesn't affect your score; in fact, it may even improve.
Thankfully, you can enlist the services of a to bring your score back up.
How much does credit counseling cost?
As noted, the initial session is free, and you won't be charged any money. But enrolling in a debt management plan will cost you a set-up fee and a monthly fee. You can expect to pay between $50 and $75 for the former and $25 to $35 per month.
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- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
The bottom line
Having a healthy relationship with money is fundamental to having a good quality of life, so it's important to take charge and create a financial plan that helps you build a stronger financial future. Working with a qualified credit counselor is one of the best steps you can take toward taking control of your finances and making a plan for reducing your debts and building a more stable and secure financial life for yourself.
Building a better financial future starts with a healthy attitude toward money. Paying your bills on time and living within your means are both key to developing good spending habits and controlling your expenses. However, you also need to have a plan in place for managing your money and budgeting your income so you can be sure you're putting aside enough money to pay your bills and cover all of your expenses. A credit counselor can work with you to develop a detailed financial plan that will help you manage your income and spending, and remove any financial challenges you may be facing. This will create a more sustainable lifestyle that will allow you to take care of your personal needs and reduce your debt at the same time.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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