How Credit Counseling Can Help You – Forbes Advisor - Forbes

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Credit counseling is designed to help consumers who may be struggling with money issues. From debt counseling to budgeting to advice on home buying or bankruptcy, credit counselors can help you navigate a number of financial challenges.

You can take advantage of nonprofit credit counseling services through an organization like the National Foundation for Credit Counseling (NFCC). There also are companies that offer debt relief and credit repair services in exchange for a fee.

But how do you know if credit counseling is worth your time? Understanding more about how it works can help you decide if it’s right for you.

What Is Credit Counseling?

Credit counseling is a broad term that describes a range of services aimed at helping people take control of their finances. Individual counseling and setting up debt management plans make up a large part of what credit counselors do, but those are not the only services they provide.

If you’re considering working with a credit counselor, it’s important to understand the difference between nonprofit, or free, credit counseling and for-profit debt relief services. Nonprofit credit counselors are typically affiliated with a professional credit counseling organization, such as the NFCC and FCAA. There is usually no fee for the initial counseling session. Small fees may apply for other services or for establishing a debt management plan.

For-profit credit counselors, on the other hand, don’t have any affiliation with the NFCC or FCAA. And, instead of providing a free credit counseling session, a for-profit debt relief company may charge fees to use their services.

Nonprofit and for-profit credit counselors also may differ when it comes to the services they offer. Knowing this is important for understanding how a credit counselor may be able to help you.

What Services Do Credit Counselors Offer?

If you’re working with a nonprofit credit counselor, there are a number of things they should be able to help you with. The NFCC, for example, offers the following services for consumers:

Debt management plans. Debt management plans (DMPs) allow you to streamline and consolidate debt payments, while potentially lowering your interest rate and reducing fees. You make one payment to your debts each month and the credit counseling agency distributes it among your creditors. If you’re not getting ahead with your debt, a credit counselor could help you enroll in a DMP.
Student loan counseling services. Student loan counseling can help you develop a plan for repaying and managing student loans. Your credit counselor can discuss various repayment options that may work for your budget, as well as loan consolidation or refinancing.
Small business owner financial coaching. If you run a small business, you may need help with things like budgeting, managing cash flow and repaying business debts. Credit counselors can walk you through the basics of small business finance so you can better manage the bottom line.
Credit report reviews. Credit counselors can review your credit reports to help you find errors that might be hurting your score so you can dispute them. They can help you understand what’s helping or hurting your score overall and specific steps you can take to improve your credit history.
Homeownership counseling. If you’re ready to buy a home, the NFCC offers homeownership counseling to help ensure you’re financially prepared. You also can get help with loan modifications if you currently own a home and are having difficulty keeping up with the payments.
Reverse mortgage counseling. A reverse mortgage is something you might consider if you already own a home and want to create an additional income stream in retirement. You can get help from a credit counselor to decide if it’s right for your financial situation.
Foreclosure prevention. If you’re in danger of falling behind on your mortgage payments or you already have, you can meet with a credit counselor to discuss foreclosure prevention options. These could include a short sale, a deed in lieu of foreclosure or a loan modification.
Bankruptcy counseling. Bankruptcy counseling can help you decide if filing bankruptcy is right for you. You also can learn about the pros and cons of a bankruptcy filing and what it might mean for your credit score and finances.

Credit counseling services also can help with other challenges, like budgeting or expense tracking. If you struggle with making a budget or living your budget, for example, a credit counselor could walk you through your income and expenses to help you come up with a better plan for managing your money. And, if you’re stuck in the paycheck-to-paycheck cycle, a credit counselor could help you identify areas where you may be able to cut back on spending.

Credit Counselor vs. Debt Settlement

Credit counselors, debt management plans and debt settlement companies all fit under the larger umbrella term of debt relief, which also includes debt consolidation. But there’s a distinct difference between nonprofit debt counseling and paid debt relief services that focus on debt settlement.

With debt counseling, a credit counselor may start by looking at your overall debt picture. This includes:

How much you owe altogether
How much you owe to individual debts
What types of debt you have
The minimum payments for each debt
Your interest rate for each debt

The credit counselor can then suggest solutions for managing your debt, based on your financial situation. Again, these solutions may include starting a debt management plan so you can get your debts under control and avoid the possibility of having to file bankruptcy.

The goal with this type of debt counseling is to help you get caught up, if necessary, and then develop a workable plan for paying off your debt faster. You could also save money in the bargain if interest rate reductions or fee waivers are included in your debt management plan terms.

Debt settlement, on the other hand, has a different goal. Companies that offer debt relief on a for-profit basis typically help you negotiate settlements for your debts, instead of enrolling you in a debt management plan. This allows you to pay less than what’s owed to pay off a debt, assuming your creditor agrees to a settlement.

A debt settlement company may help you clear your debt while potentially saving money, but it’s generally considered risky and an option of last resort. This is because it’s usually damaging to your credit, as many creditors may not even consider a settlement unless the debt is significantly past due. And debt relief companies can charge you up-front or monthly fees to help you settle your debt.

Between the two, credit counseling is the better option if you want to repay what you owe in full while minimizing negative impacts to your credit score. An accompanying debt management plan also doesn’t require you to have large amounts of cash available to settle with; you can pay monthly instead. That’s a plus if you’re living on a tight budget and extra cash is limited.

Both credit counseling and debt settlement are different from credit repair services. With credit repair, you’re usually paying a fee to have a company attempt to clean up your credit report. But these services can’t do anything legally that you can’t do yourself to improve your credit, which is why the Federal Trade Commission cautions consumers against credit repair scams.

How to Get Help From Credit Counseling Services

Credit counseling can help in a number of situations. The NFCC, for example, helps:

Students
First-time homebuyers
Current homeowners
Military members or veterans
Small business owners
People with debt

If you’re interested in using nonprofit credit counseling services, it’s important to know what to look for. Some of the key things to consider when comparing credit counseling agencies include:

Accreditation and certification. Ideally, you should be working with a credit counselor that’s certified and affiliated with the National Foundation for Credit Counseling or with the Financial Counseling Association of America (FCAA), which also has a network of member nonprofit credit counseling agencies from which you can choose.
Services. If you’re looking to a credit counselor for help, it’s important to know exactly what services they offer. This can help you find a credit counseling agency that’s a match, in terms of what you need help with most.
Cost. When working with a nonprofit credit counselor, keep in mind that free credit counseling may not be a given. There may be a small one-time fee or monthly fee involved, depending on which services you’re using. The NFCC encourages member credit counselors to keep fees as low as possible, so—before agreeing to anything—be sure to understand what you may be asked to pay.
Debt minimums. You may need to have a certain amount of debt to qualify for a debt management plan. So check to see if there’s a required minimum if you’re looking for debt counseling specifically.

Bottom Line

If you’re enrolling in a debt management plan with a credit counseling agency, make sure you’re clear on the details. This includes which debts are included in the plan, your monthly payment and how those payments are distributed. You also can ask about fee waivers or interest rate reductions, as well as how many payments you’ll need to make to become debt-free.

Remember that you should be able to schedule an initial session with a nonprofit credit counseling agency at no charge. This can give you an opportunity to decide if credit counseling can help before making a full commitment.

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