In this article:
- What Does a Credit Counselor Do?
- How Much Does Credit Counseling Cost?
- Does Credit Counseling Affect Your Credit?
- How to Choose a Credit Counselor
Credit counselors can offer guidance on how to manage your finances, whether that's improving your credit, getting out of debt or improving your budgeting. Credit counselors are often certified and have the background knowledge and experience and can provide you with personalized advice.
If you're struggling to keep up with debt payments, or you simply need some help to figure out your finances, here's how a credit counselor can help.
What Does a Credit Counselor Do?
Credit counselors can provide a variety of services that range from basic budgeting advice to debt management plans. Here's some of what you can expect if you decide to work with one.
Personalized Advice
Nonprofit credit counseling agencies typically offer free consultations in which a counselor will discuss your financial situation and help you develop a personalized plan to improve your money management. Areas of focus can include:
- Developing a budget
- Managing bills and debts
- Gaining access to your credit reports and scores
- Improving financial literacy
- Escaping a paycheck-to-paycheck lifestyle
- Avoiding bankruptcy
- Creating a financial plan
If you're thinking about filing for bankruptcy, the courts require you to complete a pre-bankruptcy credit counseling session.
Financial Workshops
If you're not ready to consult with a credit counselor one on one, you may be able to attend workshops on a variety of topics, including:
- Homebuyer education
- Budgeting
- Credit card management
- Maintaining a healthy credit history
- Bankruptcy
- Student loan counseling
If you have a particular question or issue, check with local credit counseling agencies to see if they offer a workshop that can help you.
Debt Management Plans
If you're behind on your monthly debt payments or you're concerned about falling behind, a credit counselor may be able to help you get on a debt management plan.
With this arrangement, the credit counselor can negotiate lower interest rates and monthly payments on your unsecured debt—primarily credit cards—and possibly even get late charges waived and bring your account back to current status.
In exchange, you'll typically need to close your credit card accounts and make a monthly payment to the agency for all of your debts, which it'll distribute to your creditors on your behalf. Debt management plans typically last three to five years.
How Much Does Credit Counseling Cost?
Nonprofit credit counseling agencies typically offer consultation services and workshops for free or at a low cost. If you opt for a debt management plan, however, you'll typically have to pay a one-time setup fee and a monthly fee throughout the plan period.
Fees for these plans are regulated by the federal government, as well as by the state in which the agency operates. The federal government caps the setup fee at $79, but some charge much less than that. Monthly fees are typically within the range of $20 to $40, but some may charge more.
Does Credit Counseling Affect Your Credit?
Attending a workshop or consulting with a credit counselor to get help managing your finances won't have any impact on your credit.
However, if you enter into a debt management plan, your credit score may be impacted in a few ways:
- Closing your credit cards can increase your credit utilization rate.
- If the credit counselor negotiates for you to pay less than what you owe, the account may be reported as settled, which can damage your payment history.
- Missing a payment by 30 days or more while you transition into your debt management plan will show up on your credit report for seven years and will impact your credit score.
Also, keep in mind that creditors may add a note to your account on your credit report saying that you're on a debt management plan or that account payments are being managed by a credit counseling service. Future lenders can see it and may adjust their approval or terms based on that information.
How to Choose a Credit Counselor
Not all credit counseling agencies are created equal, and while it's recommended to work with a nonprofit agency, the nonprofit status doesn't guarantee that you'll get free, inexpensive or legitimate services.
To avoid a bad experience, here are some steps you can take to find a good credit counselor:
- Determine your needs. Some credit counseling agencies may be better suited for you than others if they specialize in certain areas of financial management. Knowing what you need can help you narrow down your list of options once you get started.
- Use a reputable starting point. Organizations like the National Foundation for Credit Counseling and the Financial Counseling Association of America provide lists of agencies that meet certain standards. Additionally, the U.S. Trustee Program offers a search tool you can use to find agencies that offer pre-bankruptcy counseling, among other services.
- Set up an initial consultation. Before you provide your financial details, set up a preliminary meeting with a few credit counselors and ask questions about their certification, nonprofit status, services, costs and other factors that are important to you.
As you go through this process, watch out for red flags. For example, if a counselor tries to push a debt management plan as your only option, claims that they can have accurate information removed from your credit history, gets paid on commission or doesn't appear to be honest about costs, don't be afraid to walk away.
Consider All of Your Options
If you just want some help improving your money management and financial literacy, a free consultation with a credit counselor can help you achieve your goals. But if you're thinking about a debt management plan, consider the potential drawbacks and whether you can accomplish your goal another way.
Take some time to research ways to pay off debt through debt consolidation, the debt snowball or avalanche method, negotiating with your creditors and other options. If you're considering a debt consolidation loan, Experian CreditMatch™ can help you get matched with offers based on your credit profile.
As an expert in personal finance and credit counseling, I bring a wealth of knowledge and experience to shed light on the concepts discussed in the article about credit counseling. I have a deep understanding of financial management, credit improvement, and debt resolution strategies, and I've actively worked in the field.
The article covers various aspects of credit counseling, and I'll provide insights into each concept mentioned:
1. What Does a Credit Counselor Do?
Credit counselors play a crucial role in offering guidance on managing finances. They provide personalized advice on developing budgets, managing bills and debts, accessing credit reports and scores, improving financial literacy, and more. Additionally, they conduct financial workshops on topics such as homebuyer education, budgeting, credit card management, and bankruptcy.
2. How Much Does Credit Counseling Cost?
Nonprofit credit counseling agencies often offer free consultations and workshops. However, if you opt for a debt management plan, there might be one-time setup fees and monthly charges. Federal regulations cap the setup fee at $79, but monthly fees can vary. It's important to understand the costs associated with these services.
3. Does Credit Counseling Affect Your Credit?
Attending workshops or consulting with a credit counselor generally does not impact your credit. However, entering a debt management plan may affect your credit score. Closing credit cards can impact credit utilization, settling an account may affect payment history, and missing payments during the transition to a debt management plan can have lasting effects on your credit report.
4. How to Choose a Credit Counselor
Choosing the right credit counselor is crucial. It's advisable to work with nonprofit agencies, but their status doesn't guarantee free or legitimate services. To make an informed decision, determine your needs, use reputable starting points like the National Foundation for Credit Counseling, and set up initial consultations with credit counselors. Look for red flags, such as pushy debt management plan recommendations or dishonesty about costs.
In conclusion, credit counseling can be a valuable resource for managing finances and improving credit, but it's essential to carefully consider the options, costs, and potential impacts on your credit before making decisions. If you have specific questions or need further clarification on any aspect of credit counseling, feel free to ask.
