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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

Credit Counseling: How to Choose the Perfect Organization One For You

Credit Counseling: How to Choose the Perfect Organization One For You

If you're in debt or feel your debt is growing, you're probably not alone. As many Americans are still trying to get their debt under control largely from the effect of the pandemic, thanks in large part to stimulus payments, the tide has started to turn for good. The Federal Reserve's quarterly report on household debt and credit show that total household debt rose 1.9%, or $286 billion, in the third quarter of 2021. Credit card balances have increased by 17 billion dollars at the end of 2021. If your debt is due to credit cards, medical bills, major repairs, student loans, or anything else, a credit counselor can help. Credit counselors work in organizations that provide credit counseling services. They can help you review your finances, including your family budget, credit reports, and general consumer debt, to identify what action to take to improve your situation. According to the National Financial Counseling Foundation's (NFCC) 2020 Financial Literacy Survey, about one in four American adults said they would consider contacting a non-profit credit counseling agency for help in case of a problem.

If you're considering seeking such assistance, here's how to choose the right credit counseling agency for you.


What is credit counseling?

It involves working with an agency that investigates your finances and makes recommendations to help you get rid of your debts. This is a strategy that can help you take charge of your finances and improve your situation. The agency can help you create a budget and solve money problems. You can also create a debt management plan. With a debt management plan, you can get lower interest rates for your creditors and get rid of debt faster than you would if you just made monthly payments.


How does it work?

If you are looking for a credit counselor, you will meet with a credit counselor for an inceptive counseling session and share some basic details about your financial situation. These can include income, current debt, and monthly expenses.

Once you know where you stand financially, your counselor will likely offer you a debt management plan or alternative. They can also help you budget and focus on money management training and other resources.


Why should I apply?

There are several reasons why you might want to seek credit counseling. If you are in debt and want to improve your financial situation, they can provide you with the support you need. You can uncover financial issues you didn't know you had, budget your one-time income and expenses, and pay off debts sooner than you can on your own. You can save thousands of dollars in interest by opting for a debt management plan.


Types of Credit Counseling Services

Credit counseling agencies offer various services, including general budgeting services, debt management plans, bankruptcy advice, student loan advice, and housing advice.


General budgeting

A credit counselor can help you with general budgeting techniques. Your credit counselor usually offers a free first session, usually one hour, which will include an overview of your goals and current financial practices. Budget discussions will include an overview of your income and expenses and a summary of your financial goals. You may be able to get additional budget counseling sessions in addition to this session. Who should consider this? People who don't have a budget or want to improve their current budget so they can live independently and avoid overspending.


Debt Management

A credit counselor creates a plan to consolidate debt and reduce interest rates. Usually, a credit counselor aims to help you get out of debt for three to five years. Who should consider this? People with a large amount of high-interest credit card debts who want to consolidate their payments and save interest.


Bankruptcy Counseling 

Bankruptcy is a legal proceeding in a bankruptcy court in the United States that allows you to pay your debts. Bankruptcy counseling offers two financial education sessions: one before filing for bankruptcy and one after paying the debts. Who should consider this? People who have exhausted all other debt reduction options and want to file for bankruptcy to pay off their large debts.


Student Loan Counseling

If you have difficulty repaying your student loans, consult a credit counselor for information on repayment options. A counselor can help you talk to your student loan issuers about reducing interest rates or consolidating your loans if that makes sense. Who should consider it? People who have massive student loan debt and would like to pay it off sooner or later.


Housing Counseling 

If you have questions about buying a home for the first time or are having trouble paying your rent, housing counseling can help. Whatever the situation, there are various options available through credit counseling. Who should consider it? People struggling to pay their rent or want a guide to help them buy their first home.


Credit counseling organizations

It is important to consider the differences between for-profit and nonprofit credit counseling services before choosing a credit counselor.


Non-profit credit counseling organizations

Credit counseling organizations are non-profit organizations that can provide information on managing money and debt, according to the Office of Consumer Financial Protection (CFPB). Non-profit credit counseling organizations, such as credit unions, often offer free seminars and educational materials. A first counseling session usually lasts one hour. Also, you can take advantage of follow-up sessions, and your credit counselor can create a debt management plan for you.  A debt management strategy usually requires you to make a one-time payment to the credit counseling agency each month or each pay period so that the credit counseling agency can issue these monthly payments to creditors.


For-Profit Credit Counseling Services

For-profit debt settlement firms are generally not credit counseling services and generally charge fees for their services. The CFPB lists several risks you may want to consider before choosing a debt settlement company:

  • A creditor can bring a collection action against you.

  • A debt settlement company may prefer to stop paying your credit card bills during the negotiation process, which can hurt your credit score. You may incur late fees, late payment interest, and other charges.

  • Debt settlement companies often fail to pay all of your debts.

  • Fines and taxes on unpaid debts can wipe out any savings the debt settlement company could make.

  • Some of your creditors may refuse to work with the settlement agency of your choice.


How to get started

All you have to do is take one small step in the right direction - decide if your credit counselor is right for you. Want to keep paying for your house, car, and utilities while paying with your credit cards at the same time? Ask yourself how you will stay in control of your debts and finances once and for all. Try to get help as soon as possible, as your credit score could be affected. A bad credit score informs lenders that you are a high-risk borrower, and they may not give you a loan when you want or need it.

Finally, make sure that you choose your organization carefully and that it is reputable to know you are working with a legitimate agency and not a debt settlement company.


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Jim McClaflin, EA, NTPI Fellow, CTRC
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