Credit Counseling

Managing debt and personal finances is a difficult process for many. There are several options for those seeking debt relief, but not all of them are beneficial except in certain cases.

Knowing what options are out there and which are best for a given financial situation is crucial when dealing with debt. Credit counseling can be a great option for those who are having trouble understanding or managing their finances and those who need debt relief but do not want to take any drastic measures. Credit counseling agencies offer clients:

  • Advice on managing finances and debts.
  • Help with financial planning and budgeting.
  • Free educational materials.
  • Copies of credit reports and scores.
  • A debt management plan.

For most, credit counseling is a good first step on the way to debt relief and financial security. This type of counseling is typically available for free or at a low price and is provided by accredited nonprofit agencies. Although many people will need to take further steps to manage their debt, many others will be well equipped to take charge of their finances simply by undergoing credit counseling without need for more drastic solutions. Read on to learn more about credit counseling and how it can be a beneficial option for you.

About Credit Counseling Services

Credit counseling services offer clients many resources for managing debt, as well as personal finances and credit building. These services help clients understand the options available to them and which are best suited for their financial needs. During credit counseling, counselors work with their clients to create a financial plan that addresses the client’s specific needs.

Credit counseling services are offered by different kinds of agencies, such as credit unions, nonprofit entities and religious organizations. Credit counseling agencies typically offer most, if not all, of the following five services:

  • General budgeting – Starting with an initial session, a counselor reviews a client’s finances and helps him or her develop a budget if necessary. The counselor takes into account the client’s monthly income, expenses and financial goals before budgeting and deciding if the client needs further counseling.
  • Bankruptcy counseling – Those who plan on filing for bankruptcy are required to attend counseling both before and during the debt-clearing process. Credit counseling agencies typically offer bankruptcy counseling services to those who are considering bankruptcy.
  • Student loan counseling – Student loan counselors help clients figure out which options are best for managing their student loans, including consolidation, student loan forgiveness and repayment plans.
  • Housing counseling – This kind of counseling includes guidance for financial issues involving housing, such as pre-purchase, reverse mortgage and delinquent mortgage counseling. Some agencies also offer homebuyer education programs that are sometimes required by mortgage lenders prior to a purchase.
  • Debt management plan – A counselor helps a client with debts create a plan for managing those debts. A debt management plan reduces debts to one singular monthly payment and can run anywhere from three to five years.

Developing a Debt Management Plan

Credit counselors often recommend a debt management plan to clients who are in debt and are having trouble making payments. These plans can help individuals pay off consumer debts in a way that saves money and time. While debt management plans are not for everyone, they are useful for those who have fair amount of credit card debt and are able to gain control over their debt without taking more drastic measures.

Debt management plans are typically used for credit card debt and cannot be used for medical or student loan debts. These plans work similarly to debt consolidation programs, as the debts are consolidated into one monthly payment. However, counseling agencies work directly with creditors to get interest rates reduced and require that the consumer agree to a payment plan that is between three and five years in length.

Through credit counseling, the consumer makes a monthly payment to the credit counseling agency, and the agency in turn makes payments to the consumer’s creditors. With lower interest rates and a single monthly payment, debt management plans make it easier for consumers to manage and pay off their debts.

A debt management plan is not the right option for everyone. These plans are best for those who can get by without opening new lines of credit and who can afford monthly payments. The fees involved in debt management plans vary by state but typically do not amount to more than $50 per month. A credit counselor can help determine whether a debt management plan is the best choice for a particular financial situation.

Choosing a Credit Counseling Service

Finding credit counseling services can be easier than searching for other financial services. The National Foundation for Credit Counseling accredits nonprofit credit counseling agencies, which hire certified consumer credit counselors. Financial education and counseling services offered by nonprofit counseling agencies are free or low cost.

Initial consultations with a credit counselor are free of charge, so there is no risk or cost involved in seeking a credit counseling service. However, not everyone needs credit counseling. Those who meet the following circumstances should consider credit counseling:

  • Struggling to meet monthly credit card or mortgage payments
  • Considering bankruptcy or purchasing a home
  • Considering or have been denied a consolidation loan for unsecured debt
  • Looking for advice and help setting financial goals

Before enrolling in any financial service, check with the state attorney general or local Federal Trade Commission (FTC) agency for any consumer complaints that have been filed against the agency in question. Ensure that the agency you choose is accredited and certified to offer financial planning and advice services. Avoid agencies that charge for educational materials without a service being provided.

Reputable agencies are typically nonprofit agencies, so take caution with for-profit companies that offer credit counseling services. Also consider how you would like to access credit counseling sessions. While some agencies offer sessions in person, most offer counseling by phone or online. Agencies may only offer in-person consultations in certain areas, and not all agencies work in all 50 states. Prices and fees vary by state and by program. Confirm your projected monthly payments with your credit counselor before committing to any program or payment plan.

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