When credit card debt gets out of control -- because of a divorce, medical issues, excessive spending or a combination of factors -- you might need help to get back in the black. A credit counselor can work with you to set up a budget and payment plan so you can resolve outstanding debts and plan for a better financial future. Here's what credit counselors do and how you can get one.
What Is Credit Counseling?
Credit counselors are trained to offer advice on debt management, budgeting and consumer credit. Through one-on-one counseling, workshops and educational materials, they can tailor a plan to your situation.
During credit counseling, your income, assets and debt are analyzed to determine the best way to address financial issues, says Mike Sullivan, director of education with Take Charge America, a nonprofit credit counseling and debt management agency based in Phoenix.
Peter Klipa, senior vice president of creditor relations for the National Foundation for Credit Counseling, says assistance from a counselor could be as basic as helping you understand your income and expenses and setting up a budget. Counselors can also advise on issues such as student loan debt, reverse mortgages and starting a small business.
Is Credit Counseling a Good Idea?
Debt-related issues are usually the main reason people seek out credit counselors.
According to the 2019 NFCC Consumer Financial Literacy Survey, 60% of consumers surveyed had credit card debt in the last 12 months, with 37% carrying it over month to month. The same survey found about one in four U.S. adults said they would get help from a professional nonprofit credit counseling agency if they were having debt-related financial problems.
If you need help from a credit counselor, seek it early, as the best financial options dwindle with each missed monthly payment.
"Credit counselors specialize in credit card debt, so you should reach out as soon as you become concerned about the amount of credit card and other unsecured debt you have," Sullivan says.
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Klipa says consumers who contact credit counselors usually have about $10,000 to $15,000 in credit card debt on multiple cards. Consumers in dire situations may be trying to figure out how to keep their house, car and utility payments going while paying off credit cards.
How Can I Find a Credit Counselor?
Looking for referrals from friends and family is one way to start searching for a credit counseling agency. Check with your financial institution, university or a local consumer protection agency as well.
The credit counseling agency should be certified by the NFCC, which offers a website and toll-free number to help you find its certified members. Its referral service will direct you to credit counseling agencies near you.
"We try to meet people wherever they are and make it as easy for them to plug in (to a credit counseling service) as possible," Klipa says.
Once you've found a few agencies you like, review their backgrounds with your state's attorney general's office and local consumer protection agencies to see if any complaints have been made against them. It helps to also look at the Better Business Bureau's website, which provides ratings of agencies up to A+. You can also find prebankruptcy credit counseling agencies through the United States Trustee Program.
Before hiring a counselor, ask these questions:
-- What services do you offer and are you licensed to provide them in my state?
-- Can you help me develop a long-term financial plan?
-- What are your fees and what if I can't afford them?
Approach your search for a counselor like you would an attorney, accountant or similar professional, Sullivan says. "A good counselor is happy to give you time to review materials, including agreements, and should not rush you," he says. "There must be time for your questions, and the counselor should have the answers. The counselor should be able to tell you if he or she is certified and verify that the agency is accredited."
How Does Credit Counseling Work?
Once you've settled on an agency and set an appointment with a counselor, learn what information you'll need for your initial meeting. The better prepared you are, the more likely the meeting will go smoothly.
Although in-person meetings are ideal for some, they're not always possible. As a result, most are handled by phone, and some take place online, Klipa says.
During a first meeting -- which could take about a half-hour to an hour -- counselors will likely review pay stubs to establish income, as well as expenses such as rent, car payments and cable bills. Sullivan says counselors will create a profile including assets, a budget and a list of debts, and will also address issues such as overspending or inadequate savings for emergencies or retirement.
With an understanding of your financial situation, the counselor will help you create a new budget that includes debt repayment and savings.
A counselor might suggest a debt management plan, or DMP, if you have a lot of unsecured debt with two or more creditors but enough income to make a payment each month. This plan is developed after a thorough review of your assets, income and debt.
The DMP will determine the amount of money available to you each month, which will serve as the baseline to begin to get out of debt, Klipa says. Having a defined plan can help creditors get on board with negotiations.
To get to that number, you might need to do some belt-tightening, such as cutting back on cable channels or eating out less. Doing so helps build your case with creditors to show that "everything has been done that could be done to curb that expense load," Klipa says.
If your creditors accept the debt management plan, you will provide money each month to the credit agency, which then pays your unsecured debts, such as credit card and medical bills. The strong relationships between creditors and agencies allow agencies to be reputable negotiators on your behalf.
"Banks interface with agencies and counselors every day," Klipa says. "They'll have their own brand of oversight that occurs."
A debt management plan can take between 30 and 60 months to pay off, according to the NFCC, but that's not necessarily a bad thing.
"Consumers on a DMP can see interest rates fall by 15% or 20%," Sullivan says. They might get relief from late payments and fees, and "can avoid bankruptcy and the credit destruction that comes with debt settlement and default."
As an extra precaution, keep in touch with your creditors to make sure that they accepted the plan and that the payments are on time each month.
How Much Does Credit Counseling Cost?
The costs for credit counseling vary from state to state, but the majority of services are offered at no to low cost, according to the NFCC.
People who visit a NFCC-certified agency for debt counseling get a review and assessment, and won't be turned away, Klipa says.
There are charges for a debt management plan, depending on what eventually will be paid back. In addition to a small setup fee, you may pay a fee of $25 to $60 per month, according to experts.
Credit counseling can also help your long-term bottom line because paying off debt is one of the best ways to quickly boost your credit score.
What Are Some Alternatives to Credit Counseling?
An alternative to counseling is to work with creditors on your own. You don't have to involve a third party to negotiate debts. However, credit counselors may have a better idea of what you can expect from payment plans that creditors will be accept.
Another common alternative is debt settlement, which is usually offered by for-profit companies. The debt settlement companies offer to negotiate on your behalf to pay off a debt, but be aware that this is not the same as a debt management plan and that the company might not pay off all your debts. Debt settlement can be risky to your credit and financial situation and is generally a poor choice compared with credit counseling.
Also, it's possible you won't get any counseling with a debt settlement agreement, which could make it more likely you end up in the same situation again, Klipa says.
A debt consolidation loan is another option, if you qualify.
If you opt to use a credit counselor and draw up a financial plan -- whether a debt management plan or not -- personal discipline is the key to long-term success.
"Credit counseling can't do miracles," Klipa says. "But there are a lot of people who benefit from it. Hundreds of thousands are being helped each year, whether they're on a DMP or just get basic counseling."