Credit Counseling: When you Need it and When you Don't

By Nora Dunn. Last updated 4 February 2010. 22 comments
Photo: Hamed Saber

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.

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Guest's picture
Snit

Thank you so much for this. I need serious help and have been wondering what and if credit couseling is appropriate for me. It is, I see, thanks to this article.

Guest's picture
Minimum Wage

What can credit coundelors do about student loans - especially student loans in default?

I worry about money all the time, but I don't think there is anything a credit counselor can help me with.

Nora Dunn's picture

Although I can't say for sure, it is my impression that even student loans can be handled if you are a candidate for credit counseling. They negotiate a lower rate of interest and waive any late fees and penalties you may be facing. In return, you would pay the counseling firm directly, and they would repay your debts.

In doing your research, be sure to ask potential counselors if they can help you with student debts. 

Guest's picture
Minimum Wage

Hmmm, very interesting! I had no idea student loans could potentially be addressed by credit counselors, I thought they were just sorta off-limits.

Reducing my interest rate to something even close to what others are paying would reduce payoff time in half or more because my payments now are almost all interest.

Guest's picture
Guest

Here is the problem that I had with Credit Counseling. 4 years prior to my wife and I getting married I went to a Credit counseling service. They helped negoiate my terms on my credit cards down and were a big help. But, when my wife and went to get financing on a home purchase - it really dinged my credit and hurt us in trying to get into a home loan. I would advice to try not to use them, if anytime in the next 5 to 6 years that you will be trying to buy a home or get any kind of substantial loan. It shows future creditors that you aren't responsible enough to handle money. My two cents!
JL

Nora Dunn's picture

@JL: That is one part that I didn't mention in the article...credit counseling will indeed be a black mark on your credit and can prohibit future purchases, as it did in your case.

That is why some credit counselors may actually encourage you to tackle your debts on your own if you aren't too far down the "rabbit hole". If you think you can manage them on your own, it is best.

I ultimately see credit counseling as the last bastion before claiming bankruptcy (which is an even bigger black mark on your credit rating).  

Guest's picture
Guest

My wife and I had a similar crisis a few years back and are just now getting the "debt management program" notes off our credit reports. It's really true, most creditors see this as bankruptcy even though it's not.

It would be nice if creditors would just take your reduced payments and report you as current -- but noooooo, that would be too honorable! So they have to ding you for all you're worth, then wait 7 years to remove the derogatories.

Guest's picture
Guest

Several years ago, my husband and I were in need of debt management. We had no idea that it existed until one of the credit card companies we were having difficulty keeping up payments with, suggested a debt management company that they worked with. We were not charged monthly fees, the credit card companies covered it. We were able to get out of debt in no time.

Guest's picture
Guest

I'm over halfway throught my DMP and my only regret is that I hadn't called sooner. I know it will look bad on my credit report for a couple of years, but it would have taken me MUCH longer to pay off my debts at their original (high) interest rates. I was stupid in incurring them and the marks on my credit are my punishment, but I know that I will be debt free soon and will never go back (except for mortgage/car loan). They actually suggested that I pay off a couple of the lower amounts on my own and didn't enroll them in the program because the interest reduction wasn't significant and I was able to pay all of them off within a year and a half. Thus I still have open credit (they make you close the accounts that are in the program) which makes my credit look a little better because they are all at a zero balance with the full line available. I use one card (with my credit union) and have paid it off every month ever since I paid it off completely (the first time). I usually transfer the money from my checking within 2 days of using the card and use it only for convenince (gas, online purchases, etc., when I can't use my debit pin card).

Guest's picture

This caught my eye because I just wrote about how I was taken advantage of by a debt management scam. I think you have a great list of tips to help find legitimate help. Wish I would have read this years ago!

Guest's picture
TFB

Is this post from personal experience working as a counselor or working with a counselor? Or is the info compiled from somewhere? What's the source then?

Nora Dunn's picture
Nora Dunn

Having worked in the financial planning industry, I occasionally had clients that needed help digging themselves out from under a pile of debt. And if they needed credit counseling, I needed to be able to determine if they were candidates and know where to send them.

 

Guest's picture
Guest

I'm dealing with Clear Point after checking with BBB and this is their website. http://www.clearpointfinancialsolutions.org/our_company/index.aspx

Guest's picture
Alina

Credit counseling is not always the answer. What a credit counseling or debt consolidation company does actually destroys your credit. They tell you to stop making your payments and they notify your creditors that you are in this process. Meanwhile what they don’t tell you is that all your debts are going into collection status. Then they go in there and settle your debt with the creditor for a portion of the amount which you can do yourself! Regardless if the company is non profit, they still make money by paying themselves high salaries... non profit is a lot of the time just a fancy loophole. Please research carefully before signing up with any debt consolidation or debt settlement company.... it's worse than a bankruptcy. If you can’t pay your debts you most likely are better off filing BK anyway at least that way you will have a chance at re-establishing your credit years before debt settlement. Please call me with any questions. I will be more than happy to look over your situation and point you in the right direction. If you are already in a bad credit situation, I can help, if not, a little free advice sometimes goes a long way.

Alina D. Nicol
Senior Account Executive
EZ CREDIT REPAIR LLC.,
anicol@myezcreditrepair.com
myezcreditrepair.com
TOLL OFFICE (866) 979-1099 x207
DIRECT IP LINE (702) 487-3401

Guest's picture
Blake Powers

I think that the person who posted the article "The Truth About Credit Counseling" may be a bit unsure about the difference between Credit Counseling and Debt Settlement. No legitimate Credit Counseling agency would ever ask anyone to stop paying their bills! I have checked on this and have looked into the agency listed in the link (ClearPoint). Not only to they encourage responsible credit management, they give you a free counseling session and then explain all of the options that are available to you. If you enroll in their debt repayment program, they help you pay off all of the debt you owe in a fraction of the time it would take on your own. They can do this because they help negotiate reduced interest rates on your credit cards. Lower payment, lower rate, faster journey to being debt-free. Sounds like help to me. Bankruptcy should only be considered as a last resort, and debt settlement should be avoided altogether. Many of the settlement agencies make promises that they cannot deliver, and they (not Credit Counseling agencies) are notorious for telling people to stop paying their debts in order to get a better settlement. To tell someone to worsen their financial situation has never been an ethical way to provide counseling. The job of a legitimate credit counseling agency is to improve lives through financial education. The true test of a trustworthy agency is to check them out through the Better Business Bureau and also the National Foundation for Credit Counseling. I checked ClearPoint and some other NFCC agencies with the BBB and they look very legit :)

Guest's picture
Guest

Article given is very interesting and provides insight of the credit counseling. At the same time very interesting to read. if every financial decision is getting out of hand and if it looks like you will never get out of your debts , Consolidation Credit Services can provide you with the relief and peace of mind you have been looking for. It is well designed debt management program can help you break free from the bonds of your creditors and live your life free of financial burdens.

http://www.christiansdebtcounseling.com/

Guest's picture
Guest

I am halfway through a debt management program and am considered a reprobate. I was wanting to be as responsible as I could be and enrolled in a debt management program but my credit is completely shot and I may be losing my car (was a lease when I started credit counseling) even though I have not missed on payment on my car.

I feel that there were a lot of things that my counselor did not go through with me when I started up the program, they presented it as though going through a DMP would actually be seen as a strength but in fact no creditor will even lend me $10!

My bank of 10+ years has told me that they won't accept an application from me until 4 years AFTER the DMP is paid ... so 7 years ...

In hindsight I wish that I had considered bankruptcy more seriously because the DMP will be on my credit report a lot longer than if I had just opted for BK or at least they are treated as one in the same.

Both are VERY limiting -- so if you are considering this secure your mortgage and car and other big loans/assets BEFORE you consider BK or DMP.

Guest's picture

Consumers who want to substantially reduce their debt should consider their options before contacting consumer credit counseling services. Companies specializing in debt counseling may be working on behalf of the creditors (your credit card companies, etc.). While they may offer you terms that appear attractive, remember that debt counselors may not have your best interests in mind when designing a payoff program.

Guest's picture

I’ve heard numerous bad things about debt counseling services and naturally was reluctant to give Debt Guru a try. Their employees are knowledgeable and their company is registered and certified. I fixed my debt don’t hesitate to fix yours! www.debtguru.com is remarkable!

Guest's picture
Gino

Credit and financial councelling i agree is a helpful way to at least start on your way out of debt. I thought I would help you along with a company i found that even has a few articles to help people along.

Getting out of Debt

Guest's picture

I work for a non-profit, credit counseling agency that has been credit counseling for 20 years and from what I can gather this is a pretty accurate article

Guest's picture

Another thing that you should ask the credit counselors is what type of certifications that they hold.

Most good credit counselors are going to have credit counseling certifications from-not just one-but several accreditation organizations.