How Consumer Credit Counseling Works

consumer credit counseling

If you are in debt, you are not alone. In addition to all of the resources available to help you develop your own plan to get out of debt, there are agencies that can offer assistance, too. Consumer credit counseling agencies offer many free services to individuals who need help with debt management. Here, we’ll go over what consumer credit counseling is, how it works, and how to select a good service to work with.

What is consumer credit counseling and who might need it?

Consumer credit counseling services offer financial education and assistance with debt management. Trained and certified counselors meet with anyone who wants help to develop a financial plan. These counselors understand all of the available options and can recommend the best one for your unique situation. The best part? These services are usually free.

There are both for-profit and non-profit consumer credit counseling services. For-profit agencies charge fees, which means their plans are generally more expensive. Non-profit agencies, on the other hand, are supported mostly by grant money from credit card companies. These companies provide non-profit agencies with funds to help their customers get out of debt. Because they are funded through grants and not fees alone, non-profit agencies are usually free. Sometimes they charge fees for certain services, which we’ll talk about below.

How do you know if you are a good candidate for credit counseling?

Anyone who is in debt, in particular credit card debt, should consider credit counseling. If you have recently lost your job, are experiencing a reduced income, or are living paycheck-to-paycheck, it might be for you. Anyone who uses credit cards for all of their expenses but cannot pay off their balances in full every month is also a good candidate for consumer credit counseling.

While focused on debt-relief solutions, consumer credit counseling services aren’t just for those in debt. You can work with a credit counselor to develop long-term financial goals, such as buying a home, saving for retirement, planning for a large purchase, or building up your emergency fund. A good credit counselor can help you come up with a plan to achieve these goals, too.

No matter your financial situation, consider meeting with a counselor to determine if you are a good candidate for their services. The great thing is that a meeting with the counselor is free, so you don’t have anything to lose by giving it a shot.

How does consumer credit counseling work? A step by step guide

Most people have no idea that there is a free service out there that can help them get out of debt. Here’s the step-by-step guide on how consumer credit counseling works, and how it can work for you:

1. Select an agency and schedule a free counseling session

First, select a consumer credit counseling service. (We have some tips below on how to decide which service is right for you.) Once you have selected one, you will make an appointment to meet with a certified counselor, either by phone or in-person. Non-profit counselors receive extensive training and are certified to counsel on many aspects of debt management.

2. Prepare for your meeting

If you prepare for your meeting, you’ll get the most out of it. The goal of this meeting is to give the counselor your entire financial picture so that they can help you, so it’s best to be honest and forthcoming about everything. Before your meeting, you’ll want to gather together the following:

  • Income: your paycheck or other proof of income, including withholding amounts and take-home pay.
  • Expenses: an estimate of your monthly expenses.
  • Debts: a list of your monthly payments, interest rates, and other loan terms for all car loans, student loans, mortgages, and any other loans.
  • Credit cards: a list of your credit cards, including information on your balances, interest rates, and monthly payment dates for each.

3. Review your finances with the counselor

During your meeting, you will go over your finances in detail with your counselor. Together, you’ll review your income, expenses, debt, and any other payment obligations. During this time, you will also authorize the counselor to run a credit check on you. This soft inquiry will not impact your credit score but will allow the counselor to see if there is anything on your report, such as collections, that they need to know to understand the full picture of your finances.

4. Review your options for relief

Based on your session, your credit counselor will discuss your options. Your counselor might suggest how you can budget or reduce your expenses to pay off your debt as quickly as possible. If your current income is not enough to pay off your debt, a counselor might recommend another type of counseling, such as a debt management plan (DMP).

When a DMP is put in place, your credit card companies agree to reduce the interest rates on your credit cards, which means you end up paying less money over time. Non-profit credit counseling services can negotiate with your credit card companies on your behalf to reduce your interest rates. In return, they will likely ask you to close certain cards and continue to make your monthly payments. It usually costs about $50 to $75 to set-up a DMP, along with a monthly service fee of about $25 to $35.

Another option is bankruptcy counseling. Many consumer credit counseling services offer credit counseling for anyone going through bankruptcy. Sometimes courts require that you complete these courses before they will discharge your debts. The agencies charge a fee for this, but the fee is often waived.

If applicable, your counselor might suggest that you enroll in housing counseling or foreclosure prevention counseling. There, you can learn about budgeting, mortgages, taxes, and more related to homeownership. Lastly, if you have student loans, a certified counselor can analyze your finances and provide you with information on repayment options.

5. Decide on a plan

Non-profit credit counselors are required to review all of your options with you. After doing so, they’ll make a suggestion as to which one is the best for you. However, it’s always up to you to decide which course of action to take. A good counseling service will offer an unbiased opinion, so you can be confident you are not being led astray. Don’t forget to ask questions about all the solutions offered and take control of the decision. While they are the experts, this is still your debt and your life, so the decision is ultimately yours.

6. Educate yourself

Your meeting with the credit counselor is a great place to start. Hopefully, at the end of the meeting, you will have a concrete plan to tackle your debt and you will be on the road toward living debt-free. But that might take some time. In the meantime, take advantage of the free resources the counseling agency offers so you can continue to educate yourself and build good financial habits.

How do you select a consumer credit counseling service?

Aside from choosing between for-profit and non-profit services, there are other things you should consider when selecting a consumer credit counseling service. These are the key things to look out for when making your choice:

Check their certification

First, make sure whatever service you are considering is certified. Any reputable agency will be certified by either the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Learn about what services they offer

Research exactly what services the agency offers. Beyond the free counseling service, what else is available? Most agencies have an abundance of free resources that can prove invaluable on your journey to getting rid of your debt. Check, too, what paid services they offer. It’s better to go into your meeting knowing what your options might cost than to be surprised by how much your solution ends up costing you.

Ask about fees

Counseling should always be free, but even non-profits may charge for additional services. There are, however, organizations that never charge for their services. For example, Operation Hope is a non-profit organization that partners with financial institutions to provide free financial programs to help individuals take control of their money.

Avoid shady offerings

If a consumer credit counseling service is offering something that seems too good to be true, it might be. Run from any that makes false promises, such as guaranteeing something like a change in your credit score (nobody can guarantee that). You should also confirm ahead of time that the agency will provide you with all of the debt relief options available (non-profits are required to do this, while for-profits are not). You don’t want to choose an agency that will only suggest solutions for which they charge a fee.

Are you ready to ask for help to get out of debt?

Tackling your debt doesn’t have to be a solitary experience. It also doesn’t have to cost you anything. With the right consumer credit counseling service on your side, you’ll be able to develop a free or inexpensive plan to get yourself out of debt once and for all. Finally, be sure to check out our completely free courses as you work on improving your finances!

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