Credit Counseling: When you Need it and When you Don't
So you are up to your eyeballs. Drowning in debt, expenses, and struggling to keep your head above water. You have been reduced to the life of a monk and are still making no headway. Is it time to see a credit counselor?
First, let’s take a look at the typical symptoms that may require credit counseling:
- You use credit cards to pay for groceries and other household expenses because you don’t have the cash.
- You don’t even know how much debt you owe any more.
- You use one credit card to pay off another.
- You use cash advances as the only way to get some cash.
- You are denied when you ask for an increase in your credit limit.
- You ask for a credit increase in the first place because you think it will help you manage your expenses.
- You worry about money all the time.
Let’s also assume that you have tried every way possible to “find money” in your current budget and are still financially suffering.
Now it may be time to see a credit counselor.
What Credit Counselors Do
First of all, a credit counselor will (or at least should) spend some time with you to get a handle on your situation. If it’s appropriate, they will prescribe a Debt Management Program (DMP). Basically a DMP will consolidate your debts at lower interest rates. The actual interest rates you get vary by creditors and what they can offer to credit counseling firms – it’s fairly standardized. As part of the DMP, late fees and other penalties you have incurred will also be waived – which can be substantial if you’re at the point of needing credit counseling.
Once you’re in the DMP program, you will pay the credit counselor monthly, and they will distribute the money among the creditors you owe. You have the advantage now of not having to juggle a million debt payments, and in turn you agree not to charge anything further to your cards or apply for any credit increases.
For this service, credit counselors get paid in two ways:
- They receive a rebate from the creditors
- You will also pay an upfront and monthly fee for this service
Not All Credit Counselors are Created Equal
As with any business service, you need to do your research before you sign up for a DMP plan. There are some shady credit counselors out there.
Here is a checklist of things you should look for:
- Not-for-profit status
- A good Better Business Bureau status with minimal complaints (ideally none)
- Certification with the National Foundation of Credit Counselors (NFCC) or the Independent Association of Credit Counselors (IACC)
Questions to Ask a Credit Counselor
Before signing on the dotted line (or even agreeing to an appointment), here are a few questions you should ask of your potential credit counselor:
- How long is the initial appointment? You are looking for them to say they’ll spend at least ½ an hour with you. They need to assess your entire financial situation, which can’t be done effectively if you are shuffled in and out the door in record time.
- What will you do? The best answer you can get is for them to say they’ll examine your situation, and only if it is appropriate, they can arrange a Debt Management Plan suited to your situation. Sometimes after a consultation, they will advise you to tackle your debts on your own because they’re not bad enough yet, or conversely will advise you to see a bankruptcy attorney.
- What kind of debt can you help me with? You don’t want a counselor who will just address your credit card debt if your student loans, mortgage, and other debts are also eating away at your finances.
- How much will this cost? Ideally you should not pay more than $75 up front, and no more than $35/month ongoing.
Don’t be too embarrassed about your financial situation to see somebody who can help you. The best way to move forward with your life is to take ownership of your current predicament and make the right moves towards financial freedom. It is still possible.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any bank, card issuer, airline or hotel chain.