How Credit Counseling Can Help You – Forbes Advisor
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The credit counseling is designed to help consumers who may be struggling with money problems. From debt counseling to budgeting, home buying or bankruptcy advice, credit counselors can help you overcome a number of financial challenges.
You can get nonprofit credit counseling services through an organization like the National Foundation for Credit Counseling (NFCC). There are also companies that offer debt relief and credit repair services for a fee.
But how do you know if credit counseling is worth your time? Knowing more about how it works can help you decide if it is 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. One-on-one counseling and making debt management plans are a huge part of the job of credit counselors, but these aren’t the only services they offer.
When considering working with a credit counselor, it is important to understand the difference between nonprofit or free credit counseling and for-profit debt relief services. Nonprofit credit counselors are usually affiliated with a professional credit advisory organization such as the NFCC and FCAA. There are usually no fees for the initial consultation. Small fees may apply for other services or for creating a debt management plan.
For-profit credit counselors, on the other hand, are not affiliated with the NFCC or FCAA. And instead of offering free credit counseling, a for-profit debt relief company may charge fees for using its services.
Nonprofit and for-profit credit counselors can also differ in terms of the services they offer. Knowing this is important in order to understand how a credit advisor can help you.
What services do credit advisors offer?
When you work with a nonprofit credit advisor, there are a number of things they should help you with. For example, the NFCC offers the following services to consumers:
- Debt management plans. Debt management plans (DMPs) allow you to streamline and consolidate debt payments while potentially lowering your interest rate and lowering fees. You make one payment on your debt every month and the credit counseling service distributes it to your creditors. If you are stuck with your debt, a credit advisor can help you sign up with a DMP.
- Advice center for student loans. Student loan counseling can help develop a student loan repayment and management plan. Your credit advisor can discuss various repayment options that are suitable for your budget, as well as a loan consolidation or refinance.
- Financial coaching for small business owners. If you run a small business, you may need help with budgeting, managing cash flow, and paying off business debts. Credit counselors can walk you through the basics of small business finance so you can better manage the bottom line.
- Credit report ratings. Credit counselors can review your credit reports to help you find any mistakes that could affect your score so you can appeal them. They can help you understand what is helping or harming your score overall and what steps you can take to improve your credit score.
- Home ownership advice. When you’re ready to buy a home, the NFCC offers home ownership advice to make sure you’re financially prepared. You can also get loan modification help if you currently own a home and are having trouble keeping up with payments.
- Advice on reverse mortgages. A reverse mortgage is something to consider if you already own a home and want to create an additional source of income for yourself when you retire. You can get help from a credit advisor to help you decide if it is right for your financial situation.
- Foreclosure prevention. If you are at risk of falling behind on your mortgage payments, or you already have them, you can meet with a credit counselor to discuss ways to prevent foreclosures. This could include a short sale, a deed in lieu of foreclosure, or a loan modification.
- Bankruptcy advice. The bankruptcy advice will help you decide whether filing for bankruptcy is right for you. You will also learn more about the pros and cons of filing for bankruptcy and what it could mean for your creditworthiness and finances.
Credit counseling services can also help with other challenges such as budgeting or spending tracking. For example, if you’re struggling to make a budget or live on your budget, a credit advisor can walk you through your income and expenses to help you come up with a better plan for managing your money. And if you’ve got stuck in the paycheck to paycheck cycle, a credit counselor can help you identify areas where you can potentially cut your spending.
Loan Advisor vs. Debt Settlement
Credit counselors, debt management plans, and debt settlement firms 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 that focuses on debt settlement.
When giving debt advice, a credit counselor can first look at your overall debt picture. This contains:
- How much do you owe in total
- How much do you owe each debt
- What debts do you have?
- The minimum payments for each debt
- Your interest rate on each debt
The credit counselor can then suggest solutions for managing your debt based on your financial situation. Again, these solutions can include starting a debt management plan so that you can get a grip on your debt and avoid the possibility of filing for bankruptcy.
The goal of this type of debt counseling is to help you when needed and then come up with a workable plan for faster debt settlement. Plus, you can still save money if interest rate cuts or fee waivers are included in the terms of your debt management plan.
Debt regulation, on the other hand, has a different goal. Companies that offer for-profit debt relief will usually help you negotiate compensation for your debt rather than putting you on a debt management plan. That way, you can pay less than you owe to pay off a debt, provided your creditor agrees to a settlement.
A debt settlement company can help you pay off your debts while saving money, but it is generally considered risky and a last resort. This is because it usually hurts your credit score as many creditors may not even consider settling unless the debt is significantly overdue. And debt relief companies can bill you upfront or monthly to help you pay off your debt.
Between the two, credit counseling is a better option if you want to fully repay your debt while minimizing the negative impact on your creditworthiness. An accompanying debt management plan also doesn’t require you to have large amounts of money to settle them; Instead, you can pay monthly. This is a plus if you are living on a tight budget and additional money is limited.
Both credit counseling and debt settlement are different from credit repair services. With credit repair, you usually pay a fee to have a company try to clean up your credit report. But there is nothing legally these services can do that they cannot do yourself to improve your credit score, which is why the Federal Trade Commission warns consumers about credit repair scams.
How to get help from credit counseling services
Credit counseling can help in many situations. For example, the NFCC helps:
- First time home buyers
- Current homeowners
- Military or veterans
- Small business owner
- People in debt
If you are interested in using nonprofit credit counseling services, knowing what to look for is important. Some of the most important points to keep in mind when comparing credit counseling agencies include:
- Accreditation and certification. Ideally, you should work with a certified credit counselor affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America (FCAA), which also has a network of nonprofit credit counseling agencies that you can choose from.
- Services. When seeking help from a credit advisor, it is important to know exactly what services they offer. This can help you find a credit counseling agency that is right for you in terms of what you need most.
- costs. When working with a nonprofit credit counselor, keep in mind that free credit counseling may not go without saying. There may be a small one-time fee or a monthly fee depending on the services you use. The NFCC encourages member credit counselors to keep fees as low as possible. So before agreeing to anything, you should be clear about what you may have to pay.
- Debt minimum. You may need to have a specific amount of debt to qualify for a debt management plan. So check if there is a minimum required when looking for debt counseling specifically.
When signing up for a debt management plan with a credit counseling agency, make sure that you are clear about the details. This includes what debts are included in the plan, your monthly payment, and how those payments are distributed. You can also ask about fee waivers or interest rate cuts, and the number of payments you need to make to become debt free.
Remember, you should be able to schedule a free initial meeting with a nonprofit credit counseling agency. This can give you a chance to decide if credit counseling can help before making a full commitment.