If you’re buried in credit card debt and are having trouble paying it off, you may be wondering if you should get professional help from a credit counseling or debt relief service.
Is going to one a good idea? A lousy idea? Somewhere in between? How can a credit counseling service help a person relieve their debt?
If you’re wondering how credit counseling works and what you should know going in, consider this your roadmap.
Are credit counseling services a good idea?
If you’re struggling to pay off credit card debt and are starting to believe you’ll never get it paid off, arguably, credit counseling services are a good idea, and maybe a great one. That said, you’ll only know if it’s a good or bad idea if you do it. Some people may decide credit counseling is not for them; others will probably think that it was the smartest financial decision they ever made.
But if you’ve thought about filing for bankruptcy, you’re probably a good candidate for a consumer credit counseling service.
As for whether it’s a smart financial strategy, it matters what type of credit or debt counseling service you use, says Saundra Davis, director of financial planning programs at Golden Gate University’s Ageno School of Business.
“Debt counseling services can be friend or foe,” Davis says. “Each individual should consider the pros and cons before choosing to use a service.” She adds that many of the benefits that these services offer, cardholders can do on their own.
Still, many of the services these nonprofits offer are challenging for people to do on their own, something Davis acknowledges – which is why for some people, a credit counseling service may be a lifesaver.
But some credit counseling services aren’t really credit counseling services. Sometimes people will use the terms “credit counseling,” “debt settlement,” “debt consolidation,” and “credit repair” interchangeably, and they aren’t the same things.
As the Consumer Financial Protection Bureau states, “Credit counseling organizations are usually nonprofits that advise and educate you on managing your money and debts. Debt settlement companies, debt consolidation lenders, and credit repair companies are typically for-profit companies that promise to fix your credit and debts and charge you money for taking actions you can do yourself for free.”
In other words, you’ll probably want to make sure you’re working with a reputable consumer credit counseling service rather than some of the for-profit companies that will charge you to help you with your debts.
There are also plenty of shady “companies” and individuals who would be happy to try and take the money you want to pay towards your credit card debts – and keep it for themselves. But we’ll get into that later.
What services do credit counseling services offer?
Mostly two services – they’ll help you work out a budget, and they’ll work out the payment arrangements with your creditors. But if you think having your stress levels go down, as you get your finances under control, is a service, too, then there is also that.
What are the signs that you should go to a credit counseling service?
Of course, this is a matter of opinion, but April Lewis-Parks, director of financial education at Consolidated Credit, a nonprofit credit and debt counseling service headquartered in Fort Lauderdale, Florida, has seen it all, and she thinks it’s better when people come in sooner rather than later.
“The moment your credit card debt and monthly bills start to feel like a weight you can’t carry, it’s time to take action,” she says. “Don’t wait until you’re in freefall. Get help before you hit the financial breaking point. If you’re only paying the minimum on your credit cards and barely making a dent in your balance, that’s a red flag waving loud and clear.”
Lewis-Parks adds that if your debt-to-income ratio is 40% – in other words, if 40% of your income is going to debt, “you’re walking a dangerous line. The deeper you go, the harder it is to climb out – don’t wait until you’re buried. And credit cards should never be your lifeline for essentials like rent or groceries. If they are, the alarm bells should be deafening. That’s when you know it’s time to seek help and regain control.”
How do consumer credit counseling services help individuals with excessive debt?
It generally works this way: you visit a nonprofit credit counseling service in person or online, and you’ll work with a credit counselor who will help you set up a monthly budget and decide how much money you can afford to pay your credit cards.
Let’s say that you have monthly credit card bills in which the minimum payments total $1,000 a month, and you and a credit counseling specialist determine that you really only can afford to pay the credit card companies $500 a month. If that’s the case, the process generally plays out like this:
- The credit card counseling service talks to your credit card companies and works out an arrangement.
- Instead of paying your creditors (and this could be credit card companies and medical debt or virtually any debt that you’re behind on), you’ll pay the credit card counseling service.
- They disperse your $500 a month (or whatever you end up paying) to your creditors.
- Someday your debts are paid off, and you’re back to normal.
How much do consumer credit counseling services cost?
It depends. That isn’t a very satisfying answer, and most people are going to think, “I can’t pay my credit cards. What makes you think I can pay for a credit counseling service?” but let’s go back to our hypothetical where you’re paying $500 a month towards your debts. You might find that the credit card counseling service will take out a small setup fee and a monthly maintenance fee. These are generally small numbers, and they’ll likely be taken out of whatever you’re paying every month to the credit card counseling service. You may end up paying nothing, or next to nothing, if your income is low. But these aren’t arbitrary numbers that the nonprofit decides; your state limits what these nonprofits can charge.
What is mandatory credit counseling?
Generally, if you’re filing for bankruptcy, you’ll be required to complete mandatory credit counseling first. The thinking is that it may help some people decide they’re better off doing credit counseling instead of filing for bankruptcy. On the other hand, working with a credit counselor may validate your feelings that bankruptcy is a good idea.
How do you know if a credit counseling service is reputable or not?
If the credit counseling service is associated with the National Foundation for Credit Counseling (NFCC), the Association of Independent Consumer Credit Counseling Agencies (AICCCA) or the Financial Counseling Association of America (FCAA), that’s a very good sign that this a reputable organization.
Still, if you’re really uncertain, you could go to your state attorney general’s office (you can find it at the National Association of Attorneys General website) and ask about the reputation of the credit counseling service you’re thinking of working with. Thorough online research can also be helpful when evaluating a nonprofit. If you encounter numerous negative reviews or complaints from past recipients, it may indicate potential concerns.
Other bad signs to watch out for include:
- If a consumer credit counseling service asks for money upfront, to help you get out of debt.
- If everything you’re being told sounds too good to be true. (“You’re $30,000 in debt. We’re going to have you out of it in three months…”)
- They’re pressuring you to work with them. (In other words, you feel that you are the fish, and they are desperately trying to reel you in before you get away.)
That last point is very important, Lewis-Parks says. “A good credit counseling service will prioritize your financial well-being and provide personalized, honest guidance without pressuring you.”
What else you need to know about going to a credit counseling service
There are a lot of good things about going, as noted. Other positive include:
- You’ll work with professionals who will help you come up with a manageable budget.
- Suddenly you’re making one payment to a credit counseling service instead of maybe five payments to five different credit cards.
- You’re probably going to be making smaller, more manageable payments, with less interest than you had.
- You should have fewer or no calls from debt collectors (assuming the debt the collector is calling you about is now being handled by the credit counseling service).
There’s a lot to like about nonprofit credit counseling services. Probably the best part is not having to be on the phone forever, working with credit card companies, Davis says. “Talking with creditors can be challenging and you might even feel intimidated. Professionals can help negotiate total debt, interest rates, or fees.”
What’s not to like?
Mainly two things.
One, your credit score will probably take a hit. Keep in mind, it may have been plummeting, anyway, if you were missing payments.
But, really, if you’re thinking of working with a consumer credit card counseling service, you need to not think about your credit score, says Michael Sullivan, a personal finance consultant with Take Charge America, a nonprofit credit counseling and debt management agency headquartered in Phoenix, Arizona.
“The goal of credit counseling is to permit a consumer to live debt free and credit scores are really not a focus,” Sullivan says. And if your credit score goes down, he reminds everybody that that’s not permanent. It can go back up.
You also may see a rise in your credit score, Sullivan says. “Consumers who have low credit scores may actually see an increase of up to 100 points as a result of payments arriving on time and balances decreasing.”
Lewis-Parks reports something similar. “Most people start seeing improvements in their credit score within six to twelve months of consistent payments,” she says. “The key is staying the course. By the time they complete the program, typically in three to five years, many clients see a significant boost in their credit score.”
➤ SEE MORE:What is a good credit score?
The other negative is that you won’t be able to use your credit cards. That may be a little eye-opening, jolting or maybe exactly what you’d expect.
But if you have five credit cards that are being managed by a credit counseling service, you’re not going to be using them. Sullivan says that “you may still be able to keep one card open for essential expenses like travel or emergencies if it isn’t included in the program.”
But otherwise, the credit card accounts you’ve got in a program will be closed – and while that may be unnerving, remember that the goal from here on out is to get your debts paid off so you can move on and improve your financial life.
