When should you use a credit counselor?

Many of us feel like we have too much debt and not enough money. If you’re part of that population, you may have run across the option of credit counseling. This is a popular option for people looking for relief from their debt. But what is it? And how do you know if it’s right for you?

What Is Credit Counseling?

Credit counseling is a service that certified counselors offer. These counselors help develop a plan unique to each person’s money problems. They can help teach how to manage money and debts, develop budgets, and organize a debt management plan to help pay down debts. This counseling option is primarily meant to help with unsecured debt (like credit cards), but they may also offer other programs.

Debt Management Plans (DMPs)

Debt Management Plans, or DMPs, are the primary assistance that credit counselors offer. These programs allow your credit counselor to work with your creditors on your behalf. DMPs consider your income, debt amount, expenses, and other financial commitments to determine how much you can afford to pay on your debts each month. These DMPs have you make a monthly payment that the credit counselor divides among your various debts until the debts are gone (36 to 60 months on average). 

How Do You Find Credit Counseling Services?

Credit counseling services can be either for-profit or non-profit. For-profit counseling services are working on their behalf and for a profit, leading to higher fees. However, the federal government has forbidden them from charging or collecting payments before their services have been rendered.

On the other hand, non-profit credit counseling agencies aren’t making a profit from providing their services, so many people choose to use them instead. You can find a complete list of these credit counseling agencies through the National Foundation for Credit Counseling (NFCC). It’s important to know that, to be on the list provided by the NFCC, counseling agencies have to meet the standards for accreditation and have counselors who are certified and adequately trained in helping those with too much debt. 

Before choosing your credit counseling organization, it’s recommended to look them up on the Better Business Bureau. Doing this will help you see the experiences of previous clients, the company’s overall rating, and specific complaints filed by previous clients. Taking these steps will help ensure you connect with a quality credit counselor.  

What Are the Pros of Credit Counseling?

Credit counseling can help lower the interest rates on your credit card debt, lowering the amount you pay in total. In addition, credit counselors can work to have late fees or other charges reduced or even removed. Plus, credit counseling consolidates your debts into one monthly payment. If you feel like you have too much debt, having a single payment can seem like a great option.

In addition to the monetary benefits, credit counseling can also help teach you how to better manage your finances in the future. Many credit counselors offer other classes or training on various financial topics. Plus, they can work with clients to create personalized budgets that meet each person's unique goals and needs.

What Are the Cons of Credit Counseling?

Every great thing also has its issues, and credit counseling is the same. When taking part in credit counseling, you have to pay a startup fee and a monthly fee to the agency. These are in addition to the monthly payments you set up to eliminate your debts. If you have too much debt, the extra money needed can be difficult to come by.

In addition, it can be hard to qualify for a DMP in the first place. This is especially true if you have a lot of debt and not enough income to cover reasonable repayment options. Fortunately, the credit counselor can help you determine your eligibility when you first meet with them.

Other cons include the fact that credit counseling can’t lower the principal amount you owe on your debts. In addition, the plan can be canceled if you don’t make the payments, and any interest rate breaks you were receiving will go away.

When Should You Start Credit Counseling?

Credit counseling can be the right choice if you find yourself feeling overwhelmed or anxious about the amount of debt that you have. In addition, if you have too much debt and are having trouble making your required payments, credit counseling can relieve that stress. Counselors can also help you develop a plan if you have recently lost your job or are planning on starting a business or buying a home.

In general, credit counseling is an excellent option for anyone who needs to pay off their debt faster or anyone who wants to improve their money habits to reach their goals.

What Are Some Alternatives to Credit Counseling?

If you aren’t sure if credit counseling is the right choice for you, there are some other options you may want to consider

Budgeting

It may sound simple, but coming up with a strict budget and sticking to it can take the place of credit counseling in some situations. It’s crucial to track every expense you have to budget successfully, down to the smallest splurges. The time it takes can make budgeting hard for busy people, though still not impossible.

Talk to Your Creditors

You can call your creditors and see what options they can offer you directly before you pull in a third party. Some creditors can be willing to lower your monthly payment if it means you won’t miss payments.

Debt Consolidation Loan

A personal loan that pays off your debts can be a good option if you have decent credit. Taking out a debt consolidation loan brings you down to one payment a month without adding the fees you would need to pay your credit counselor.

Conclusion

Credit counseling can be a great choice when too much debt keeps you up at night. These counselors can work to help you pay off your debts faster while equipping you with the knowledge to handle your money better in the future.

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