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Credit counseling is designed to help consumers who may be in trouble with money. From debt advice and budgeting to home buying advice and bankruptcy, credit counseling can help you overcome a number of financial challenges.
You can take advantage of nonprofit credit counseling services through an organization like the National Foundation for Credit Counseling (NFCC). There are also companies that offer debt relief and credit repair services in exchange for a fee.
But how do you know if credit counseling is worth your time? Knowing more about how it works can help you decide if it’s right for you.
What is credit counseling?
Credit counseling is a broad term that describes a range of services designed to help people take control of their finances. One-on-one counseling and setting up debt management plans is a big part of what credit counselors do, but it’s not the only services they provide.
If you are considering working with a credit counselor, it is important to understand the difference between non-profit or free credit counseling services and for-profit debt relief services. Nonprofit credit counselors are usually affiliated with a professional credit counseling organization, such as the NFCC and FCAA. There is usually no charge for the first counseling session. Small fees may apply for other services or to establish a debt management plan.
For-profit credit counselors, on the other hand, have no affiliation with the NFCC or the FCAA. And, instead of providing a free credit counseling session, a for-profit debt relief company may charge a fee for using their services.
Nonprofit and for profit credit counseling can also differ when it comes to the services they offer. Knowing this is important to understand how credit counseling can help you.
What services do credit counselors offer?
If you work with a nonprofit credit counselor, there are a number of things they should be able to help you with. The NFCC, for example, offers the following services to consumers:
- Debt management plans. Debt Management Plans (DMPs) allow you to streamline and consolidate debt payments, while potentially lowering your interest rate and fees. You make a payment on your debts each month and the credit counseling agency distributes it among your creditors. If you’re not going ahead with your debt, a credit counselor may be able to help you enroll in a DMP.
- Student loan advisory services. Student loan counselors can help you develop a student loan repayment and management plan. Your credit counselor can discuss a variety of repayment options that may suit your budget, as well as loan consolidation or refinancing.
- Small Business Owner Financial Coaching. If you run a small business, you may need help with tasks like budgeting, managing cash flow, and paying off business debts. Credit counselors can teach you the basics of small business financing so you can better manage your bottom line.
- Credit Report Reviews. Credit counselors can review your credit reports to help you find errors that could be affecting your score so that you can dispute them. They can help you understand what is helping or hurting your overall score and what specific steps you can take to improve your credit history.
- Homeownership Advice. If you’re ready to buy a home, the NFCC offers homeownership advice to help you prepare financially. You can also get help with loan modifications if you currently own a home and are having trouble making your payments.
- Reverse mortgage advice. A reverse mortgage is something you might want to consider if you already own a home and want to create an additional source of income in retirement. You can get help from a credit counselor to decide if this is right for your financial situation.
- Preventing seizures. If you’re at risk of falling behind on your mortgage payments, or if you’ve already done so, you can meet with a credit counselor to discuss foreclosure prevention options. These could include a short sale, a deed in lieu of foreclosure, or a loan modification.
- Bankruptcy advice. Bankruptcy advice can help you decide if filing for bankruptcy is right for you. You can also learn about the pros and cons of filing for bankruptcy and what it might mean for your credit score and finances.
Credit counseling services can also help with other challenges, like budgeting or tracking expenses. If you’re having trouble budgeting or living on your budget, for example, a credit counselor might explain your income and expenses to you to help you develop a better plan for managing your money. And, if you’re stuck in the paycheck-to-paycheck cycle, a credit counselor might help you identify areas where you might be able to cut spending.
Credit counseling vs debt settlement
Credit counseling, debt management plans, and debt settlement companies all fit into the larger scope of debt relief, which also includes debt consolidation. But there is a clear difference between nonprofit debt counseling services and paid debt relief services that focus on debt settlement.
With debt counseling, a credit counselor can start by looking at all of your debt. This includes:
- How much you owe in total
- How much you owe to individual debts
- What types of debt you have
- Minimum payments for each debt
- Your interest rate for each debt
The credit counselor can then offer you debt management solutions, depending on your financial situation. Again, these solutions can include starting a debt management plan so that you can get your debt under control and avoid the possibility of having to file for bankruptcy.
The goal of this type of debt counseling is to help you catch up, if necessary, and then come up with a workable plan to pay off your debt faster. You could also save money if interest rate reductions or fee waivers are included in the terms of your debt management plan.
Debt settlement, on the other hand, has a different purpose. Companies that offer for-profit debt relief usually help you negotiate debt settlements, instead of signing up for a debt management plan. This allows you to pay less than what is owed to pay off a debt, assuming your creditor agrees to a settlement.
A debt settlement company can help you clear your debts while saving money, but this is generally considered risky and an option of last resort. This is because it usually hurts your credit, as many creditors may not even consider a settlement unless the debt is significantly overdue. And debt relief companies may charge you an upfront or monthly fee to help you settle your debt.
Between the two, credit counseling is the best option if you want to pay off what you owe in full while minimizing negative impacts on your credit score. A debt management plan that comes with it also doesn’t require you to have large sums of money to settle; you can pay monthly instead. This is a plus if you are living on a tight budget and have limited extra cash.
Credit counseling and debt settlement are both different from credit repair services. With credit repair, you usually pay a fee for a business to try to clean up your credit report. But these services can’t legally do anything that you can’t do on your own to improve your credit, which is why the Federal Trade Commission is warning consumers about credit repair scams.
How To Get Help From Credit Counseling Services
Credit counseling can help in a number of situations. The NFCC, for example, helps:
- First-time home buyers
- Current owners
- Military or veterans
- Small business owners
- People in debt
If you want to use nonprofit credit counseling services, knowing what to look for is important. Here are some of the key things to consider when comparing credit counseling agencies:
- Accreditation and certification. Ideally, you should work with a certified credit counselor affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America (FCAA), which also has a network of nonprofit credit counseling agencies. from which you can choose.
- Services. If you are looking for help from a credit counselor, it is important to know exactly what services they offer. This can help you find a credit counseling agency that is right for what you need help with the most.
- Cost. When working with a nonprofit credit counselor, keep in mind that free credit counseling may not be easy. There may be small one-time fees or monthly fees involved, depending on the services you use. The NFCC encourages member credit counselors to keep fees as low as possible, so before agreeing to anything, make sure you understand what you may be asked to pay.
- Minimum debts. You may need to have a certain amount of debt to qualify for a debt management plan. So check if there is a minimum requirement if you are specifically looking for debt advice.
If you are signing up for a debt management plan with a credit counseling agency, make sure you understand the details. This includes the debts included in the plan, your monthly payment, and how those payments are distributed. You can also ask for fee waivers or interest rate reductions, as well as the number of payments you will need to make to get out of debt.
Remember, you should be able to schedule a first session with a nonprofit credit counseling agency for free. This can give you the opportunity to decide if credit counseling can help you before you fully commit.