Sometimes the only issue for you may be just the high interest rate. Credit Counseling is where you are set up with a credit counselor who will analyze your current financial situation and provide you with budgeting help. Credit counselors can introduce you to financial resources, help you with your debt repayment strategy, and recommend a debt management program should you qualify.
It’s important to understand that credit counseling, unlike debt settlement (also referred to as debt negotiation or debt resolution), does not reduce your principal balance—you will still owe the full amount of your debt. With credit counseling, you will get advice on how to manage your money, ideas and solutions that could help fix your current financial problems, and a personalized plan to help you budget and deal with your debt effectively. A credit counselor can also help you create a payment plan on your debts that you can afford.
Part of the value of consumer credit counseling is that it helps teach you better financial habits so that you can solve your debt problem now, and hopefully prevent yourself from getting back into debt again in the future.
Additionally, through credit counseling, you can enroll in a debt management plan, which comes at an additional cost. However, some people prefer this option because it lets them focus on one payment per month.
A debt management plan goes beyond consumer credit counseling by giving you a structured program that helps you pay down your debt through monthly payments. Your debt management plan is personalized to you. A credit counselor will look at all of your enrolled debts and then work with creditors to see if they will give you a lowered interest rate, known as a “concession rate.” Then the amount of your single monthly payment to the debt management plan will be based on the new concession rate(s).
It’s important to note that in a debt management plan, you don’t pay your creditors directly. Instead, you pay the debt management plan each month and they will use this money to distribute payments to your creditors. Through this method, you will be paying back 100 percent of the debt, plus interest.
Depending on your debts and how much you can afford to pay each month, it can take about 3-8 years to repay debts through a Debt Management Plan
When you narrow your search and start to talk to the consumer credit counseling agencies that look good to you, note that the first counseling session should be free. During that session, the counselor will go over your entire financial state of affairs with you. They’ll help you calculate your monthly income and expenditures, and brainstorm ways for you to make more money and spend less. Your counselor will also review your credit card debts, their interest rates and terms, and your payment histories.
Be aware that not all agencies with a “non-profit” status are legitimate. This status doesn’t automatically mean that the agency’s services are free of charge, and they may, in fact, charge high fees that are not immediately obvious. Make sure you ask about any additional fees or costs associated with whatever solutions they recommend so you get a clear picture of what you’re dealing with.
Pros and Cons of Credit Counseling
Pros
- One monthly payment: Credit counseling works as a debt consolidation tool as all of your enrolled debts will become combined into a single monthly payment—this can make it simpler for you to regain control of your finances.
- Lower rates and fees: It can save you money in interest as, moving forward, the interest rate should be lower than the combined average of your previous interest rates.
- No collection calls: Enrolling in a Debt Management Plan through a consumer credit counseling agency may help protect you from creditor collection actions as well as prevent you from becoming delinquent on your debts.
Cons
- lenders may view you as credit risk: While working with a consumer credit counseling agency along with enrollment in a debt management plan will not hurt your credit score directly, it could be noted on accounts on your credit report that they are being paid through a credit counseling program or debt management plans. Since some lenders view people enrolled in debt management plans as a credit risk, it could impact your ability to open and use additional credit lines.
- Credit card accounts may be closed: Some, or all, of your credit card accounts may be closed and you will be paying a monthly fee for credit counseling service as well as paying back 100% of your debt and its accumulated interest.
- Principal debt not reduced: Understand that if you are having a hard time making the minimum payments and aren’t comfortable with the fact that credit counseling may require you to pay even more each month, then this may not be the right option.
- Your accounts will be reflected that they are being handled by a third party agency which lenders may frown upon if you are actively seeking lending options during this time.