How Credit Counseling Works

If you have questions about your credit, such as what the information in your credit report means and how to fix errors you find in it, credit counseling can help you find the answers you seek.

It can also teach you how to establish, build and improve your credit. You may also consider seeking the advice of a credit counselor if you are having difficulty meeting your current payment obligations on your debts. Credit counseling services range from advice on general issues of personal finances to more specific concerns like buying a home, declaring bankruptcy or paying for college.

When comparing credit counseling agencies, there are several factors to consider, including their certifications and accreditations and their accessibility to you. Be aware, you should never have to pay for credit counseling services. There are plenty of nonprofit credit counseling agencies available to help you. Any company offering you credit counseling for a fee is, at best, unnecessary and, at worst, a scam. Do not confuse credit counseling agencies, which can be nonprofit organizations, from credit repair companies, which will likely charge you to perform tasks you can perform yourself. Note that credit counseling services are also distinct from debt settlement services, which may or may not be a good option for you, depending on your circumstances.

Types of Credit Counseling Services

Credit counseling services exist to empower people who are in debt with knowledge and methods to gain financial freedom. There are five essential types of services offered by most credit counseling organizations, as follows:

  • Budgeting – After gaining an overview from you of your financial situation, including your goals, income and expenses, your credit counselor will help you devise a realistic budget. Your counselor will then help you come up with practical measures you can take to stick to your budget.
  • Debt Management – After examining your current debts, your credit counselor will help you devise a plan to consolidate repayment of your debt into a single monthly payment with a lower interest rate. The goal of debt management is generally to get you debt-free within three to five years.
  • Student Loans – Your counselor can help you figure out your possible repayment options on your student loans and, in cases, speak with lenders on your behalf to negotiate a repayment plan you can reasonably and realistically adhere to.
  • Bankruptcy – Any time a person files bankruptcy, part of the process is a mandatory credit counseling session prior to the discharge of your debts and a second mandatory credit counseling session after your debts have been discharged.
  • Housing – For renters, homeowners and homebuyers, credit counseling is available to help understand available options and better manage housing costs.

Whatever type of credit counseling you seek, many credit counseling agencies will offer free educational materials on the subjects pertaining to your circumstances in addition to counseling services. If an organization attempts to charge you a fee for such information, seek out one of the many other organizations that will provide you the same information for free.

How to Compare Credit Counseling Agencies

The two primary features to compare among different credit counseling agencies are certifications and accreditations and accessibility for you. Checking a credit counseling agency’s certifications and accreditations ahead of time can help assure you of the agency’s quality and trustworthiness. Most nonprofit credit counseling agencies are members of the Financial Counseling Association of America and/or the National Foundation for Credit Counseling. Each of these organizations has a certification program with stringent requirements to guarantee a uniform degree of competence and expertise among counselors.

One smart way to start your search for credit counseling agencies is to search the lists of certified credit counselors from each of these respective organizations. In addition to certification, there is accreditation, or when a third-party agency examines and ensures a credit counseling agency adheres to certain standards of practice. You can further research the legitimacy of any credit counseling agency you are considering with the attorney general’s office and consumer protection agency of your state.

Accessibility of credit counseling services is a personal question of how you most prefer to access services and whether you have any restrictions to certain methods. For example, if you are disabled, you may prefer to conduct most of your credit counseling online from your home. On the other hand, if you do not have a home Internet connection, you may require a credit counselor with a physical location with whom you can visit in person. Likewise, you should verify whether a credit counseling agency has a website, phone number, mailing address or email address. Note that as you do your research, you may find that many credit counseling agencies may only be accredited in certain states.

 

Using a Credit Counseling Agency

After you have shopped around to find a credit counseling agency you would like to try using and have scheduled an initial session with a credit counselor, prepare ahead for your session by gathering your financial information. The more details you can collect, the easier it will be for a credit counselor to assist you and make an effective financial plan for you. Include all sources of income and all outgoing expenses. It may be good for you to organize your receipts and bring them with you, or for you to prepare a spreadsheet of your expenses so that your counselor can see your expenses more clearly. If you explore credit counseling agencies that charge a fee, find out if you can get a free initial session to try out services. Many for-profit credit counseling agencies offer this option, and you can compare multiple fee-based credit counseling agencies this way without committing to any until you are certain of which one.

A Last Word on Fees

If you decide to use a credit counseling agency that charges a fee, ask for full disclosure of all the fees you may be charged up front. Find out if there are flat set up fees, monthly maintenance fees or both. Make sure you know precisely what services you are paying for and what guarantees the agency is making for the fee. Find out, as well, what recourse you have if the agency fails to deliver on those guarantees.

 

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