Credit Counseling Definition
How is Credit Counseling Defined?
Credit counseling is defined as a service developed to help those who are struggling financially to create a pathway out of debt. It is often viewed as an essential first step in restoring the financial health of a household. Those who receive credit counseling can expect to be shown ways they can correct the cause of their troubles, improve their budget, and proceed with any debt relief options they may qualify for. Besides helping household’s avoid a devastating bankruptcy, it can also provide whatever financial education may be needed.
Credit counseling can offer a safe place to talk about debt as well as helpful information to anyone who chooses to participate in a consultation.
Because this type of counseling addresses sensitive topics, it can only be provided by companies who have received licensing through the states in which they operate. Professionals who claim to perform credit counseling must be certified to do so. Never share personal information with a company who cannot verify that they meet these regulations.
History of Credit Counseling Services
Credit counseling came about in the 1950’s when personal bankruptcies were on the rise. Creditors were worried by the amount of households who could not repay their debt.
As a solution to this problem, they formed an organization called the National Foundation for Consumer Credit (now known as the National Foundation for Credit Counseling) and created a service that would make debt repayment possible.
Over time, the credit counseling definition evolved adding more benefits for consumers. Additionally, more organizations emerged making these services more accessible. Together, with the Financial Counseling Association of America (FCAA), these organizations sought to further develop counseling and other free resources to educate the public about credit and general money management.
Is credit counseling bad for My credit?
Credit counseling, which might include multiple consultations, or a credit pull on your behalf, does not have a direct impact on your credit.
If, however, a participant in credit counseling chooses to enroll in a debt management plan (DMP), they can expect their credit to be affected in a few different ways.
First, DMPs often require that all credit accounts be closed. Because a credit score is based on factors such as credit availability and length of history, closing accounts can cause a dip in the score awarded. This is often temporary. Credit scores bounce back as a debtor becomes current on credit payments and eventually pays their balances in full.
The second way that debt management programs affect credit is only considered to be harmful by some. Participation in a plan to repay debt can be noted in one’s credit report.
Future lenders may look at this note and consider it a warning sign that they shouldn’t lend the participant money. Others may view it positively as an indication the participant is taking steps to complete an honest repayment and restore their financial health.
In either case, those seeking help with debt should be aware of what short and long-term effects on credit might result from the services offered.
How does credit counseling work?
Credit counseling is an easy process to start. If you can, begin by gathering your debt and credit information and take a moment to review it before reaching out to a company for help. Once you’ve prepared, set up a consultation with a credit counselor to address the next steps together.
You may need to provide some details, so they know how best to help. This might include the amount of debt you have, if you are behind on payments, and whether your debt is secured or unsecured.
Whether you speak with a counselor over the phone or in person, you will be led through steps that help answer the following questions:
Are these debts serviceable?
Credit counseling mostly benefits those with unsecured debts such as credit card debt, personal or payday loans, collections, and past due medical bills.
Some advice can be given concerning car, title or home equity loans. However, no concessions can be negotiated in behalf of the borrower for those debts.
Is this borrower able to repay their debts?
Using information you provide about your income and expenses, including payments toward debt, your counselor will determine if you can meet your financial commitments.
What is the best solution for this borrower’s debt?
If you have a minimal amount of debt, and a sufficient income, you may receive guidance on how to repay your debt on your own.
Those who have a higher debt balance but could budget to meet payments that have been lowered may receive more information about debt management programs.
Occasionally, the combination of borrower’s low income and extensive debt (often caused by hardship) will result in the counselor exploring bankruptcy as the best option.
How do I help this borrower proceed from here?
At the conclusion of your consultation, your counselor will aim to provide you with the resources, paperwork, or referrals you need to make a decision and move forward confidently.
No matter your choice, you are always invited to reach out when needing additional guidance.
What Fees come with credit counseling?
Credit counseling, according to its original definition, is a free service that provides the public with financial education information on debt and credit. Any nonprofit credit counseling service, such as Money Fit, has the strict responsibility to give of these services freely with no cost to those receiving the counsel.
Alternatively, debt management programs involve an enrollment fee and maintenance cost.
Credit Counseling Services
Free Credit Counseling Consultation
Free Credit Report Review
Free Budget Counseling
Debt Management Services
One-time Enrollment Fee - capped by state
Maintenance Fee - 15% of Monthly Payment
Additional Charges Should Not be Tolerated
These fees vary from company to company but cannot exceed restrictions set by each individual state. A legitimate debt management program will not charge more than 15% of your monthly debt payment. In cases of extreme need, credit counseling agencies can waive the costs of managing a borrowers debt.
When should I seek credit counseling?
Anyone who feels overwhelmed by their debt should not hesitate to reach out for help. To see if this service is the help you’re looking for, check out our list of signs that credit counseling will benefit you.
Who can provide credit counseling & where can i find them?
Perhaps you haven’t run into a credit counselor previously, but they are easier to find than you might expect.
You can visit the website of either the FCAA or the NFCC to do a quick search for credit counseling organizations in your area. If you want an unfiltered list of agencies, the Department of Justice provides an alphabetical list by state for this purpose.
Even if there are not physical branches in your area, a well-equipped nonprofit can provide credit counseling over the phone.
Once you’ve found a few options, be sure to compare their ratings and reviews with the Better Business Bureau.
If you have additional questions, start a conversation with one of our credit counseling experts today. They are here to offer you the support you need to resolve your credit and debt challenges.
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