Credit Counseling: How it works & can help you live debt free.
Is it time for a positive change in your finances? Join the hundreds of thousands of consumers we have counseled over our decades of providing nonprofit credit counseling services. We are here and ready to help you get money fit!
What Do Credit Counseling Agencies Do?
Credit counseling has been around about as long as consumers have been getting into more debt than they can manage on their own. Originally a resource to counsel consumers how to pay off their credit card debt, credit counseling has adapted through generations to serve the ever-changing needs of consumers.
Services typically provided by nonprofit credit counseling agencies include:
Debt management plans
Financial education resources
Student loan counseling
Bankruptcy counseling and education certificates
Housing counseling and home ownership preparation education
Credit report reviews and analyses
As a rule, nonprofit credit counseling agencies continue to offer help to consumers mired in debt. However, beyond mere counseling, credit counseling agencies have developed, in conjunction with creditors, debt management plans to offer significant interest rate and fee waiver concessions to their mutual clients.
For clients struggling with credit card interest rates in the upper teens to 30% or 40% or beyond, taking advantage of a debt management plan could mean they repay their debts at interest rates in the single digits or, in some cases, even at no interest.
As the credit world has evolved, credit counseling agencies have expanded their services. Now, debt management plans can work with not only your credit card debt but also doctor and hospital accounts, collections, old utility and cell phone bills, and even payday loans. Regulations prohibit the inclusion of mortgages, car loans (any “secured” debts) and most business debts, but otherwise, the opportunities to become debt free are countless.
From budget counseling to workshops on rebuilding credit, from help balancing a checkbook to webinars on tips for building an emergency savings fund, free financial education is a hallmark of nonprofit credit counseling agencies.
During this century, many credit counseling agencies, including Money Fit, have added several other services to their arsenal of money fit tools. Since 2005, approved credit counselors have offered pre-filing credit counseling and post-filing debtor education certificate programs to bankruptcy filers.
During and since the housing downturn of the late 2000s, many consumers have turned to credit counseling agencies for guidance on keeping their homes or preparing for home ownership.
More recently, many credit counseling agencies like Money Fit have added student loan counseling services, given the extreme challenges many borrowers face in repaying crushing amounts of debts incurred during college.
What is Credit Counseling and When to Seek Help?
Consumers struggling with debt worry about what might be involved with credit counseling. Many worry that the counselor will belittle them for letting themselves get into so much debt. Others feel demeaned for having to ask for help in the first place.
Please know that credit counselors exist to help you achieve your goals of living debt free, not to make you feel bad about why you got into debt in the first place. You can expect respect and compassion from your credit counselor.
Credit counseling involves:
Meeting with a credit counselor (by phone, online, via email or in person)
Establishing a personal or household budget, creating a debt elimination strategy that might involve a debt management plan
Following the strategy to become debt free in five years or less
How Much Debt Do You Have to Have Before a Credit Counselor Will Work With You?
While the typical credit counseling client has debts that equate to about one-third of the median household income in their area, there is no minimum or maximum amount of debt required to take advantage of their services. Neither is there is no fee to meet with the counselor to explore your options.
Credit Counseling Frequently Asked Questions
Select the question below to reveal the answer:
What Happens In Credit Counseling?
You can meet with a Money Fit counselor in person, by phone or correspond online. In-person counseling sessions typically last between 30 and 60 minutes. Phone counseling sessions commonly last about 30 minutes, while online exchanges can take place over several days.
- Here is a detailed look at the steps to credit counseling:
- Meet with the credit counselor to establish financial goals
- Work with credit counselor to create a budget
- Decide with credit counselor the best path for repaying and eliminating your debt
- Repay your debt on your own with your newly-created budget as a tool
- Repay your debt within the next five years at lower interest rates using the agency’s debt management plan
- Consider meeting with a bankruptcy attorney
The first thing a credit counselor should do is allow you to explain why you are seeking credit counseling. Surprisingly, there are many reasons counseling clients might give, from the obvious, “get out of debt,” to “sleep better at night,” “take back control of my finances,” “get ready to buy a home next year,” and “start a business,” to name just a few.
Once your goals have been established, you and the counselor will build a personal or household budget based upon your income, your current bills and expenses. The counselor will ask about your current debt balances, interest rates, and minimum payments, as well as whether you have been making your payments on time or if you have started to miss payments.
Once the budget is in place, you and the counselor will have a basis for discussing your options. In some cases, clients just need the budget to know how much extra they can afford to pay on their debts each month. Such clients finish the session and head home, having their budgeting tool in place. There is no charge for this service.
Some clients realize, after putting together their budget, there is absolutely no way they will ever be able to repay their debts. Perhaps they have extensive medical bills that overwhelm their income. Perhaps they have gone through an income reduction in the home (e.g. a spouse stops working in order to care for children), or they have recently gone through a divorce. Regardless of the reason, there are many cases where a referral to a bankruptcy attorney might be appropriate.
Because bankruptcy filers must first see an approved credit counselor before filing, it is best to meet with the credit counselor early to explore options. Most credit counseling agencies charge a small fee for their bankruptcy certificate services, although they must provide the service regardless of the consumer’s ability to pay.
The largest portion of clients meeting with a credit counselor recognize how greatly they will benefit from a debt management plan. The counselor shows them how long it will take to repay their current days at minimum payments (usually 15 to 25 years) and how much it will cost given their current interest charges and associated fees.
Next, the counselor explains the savings a debt management plan can offer at lower interest rates. The comparison should include any fees the credit counseling agency will charge. Typically, a debt management plan compares extremely favorably with current repayment options because of the lower interest rates.
If, at this point, you choose to enroll in a debt management plan, there is usually a one-time enrollment fee. This fee covers a small portion of the expenses the agency incurs over the next 30 to 90 days as it works with your creditors to arrange a new agreement for your repayment. The counselor will also encourage you to make your next monthly payment at this time. Be wary of any agency that tells you to stop paying your creditors, since this is a sign of debt settlement or, worse, a scam.
If you enroll in a debt management plan, you will have just one monthly payment, rather than having to set up or send multiple payments. The credit counseling agency will likely encourage you to use a direct debit payment (ACH) so that the payment is automatically made from your checking or savings account each month. Having a blank or voided check with you during your counseling session, or making it available to the credit counseling agency, will be necessary to enroll in this form of payment. Typically, you can choose from four or five different dates during the month to make the payment.
Many debt management plan clients are surprised to learn that there is no pre-payment penalty. If you choose and are in a position to repay your debts earlier than the expected 3 to 5 years, the credit counseling agency encourages you to do so. Contact your client experience representative to arrange the final payment through the agency.
To enroll and begin the process, your counselor will have you sign an agreement that lays out both your responsibilities and the responsibilities of the credit counseling agency. If your counselor does not offer such an agreement in writing, do not work with them. Such an agreement is a protection to you and for your money.
While most new creditor agreements are in place within 30 days, some might take as long as three months. In the meantime, the credit counseling agency disperses your monthly payments to the creditors so that they continue to receive payment. Several creditors also require three months of on-time payments on a debt management program before they waive late or over-limit fees incurred before program enrollment.
What Is The Purpose Of Credit Counseling?
The goal of credit counseling is to help consumers take control of their finances, establish and work toward financial goals, and accelerate their debt reduction plan in order to reach those goals.
How Does Credit Counseling Work At Money Fit?
Money Fit offers credit counseling services to help consumers repay their debts in full, typically over a three to five year period.
After the initial counseling session (in person, by phone, by chat, online, via email), clients who sign up for the debt management plan (DMP) begin making one monthly payment through Money Fit, who then disperses their payment to all of their creditors.
By regulation, DMPs cannot extend beyond five years. If you are in a position to repay the full amount earlier than planned, Money Fit encourages you to contact your counselor to arrange full payment. There are no pre-payment penalty fees.
Payment policies vary by creditor, meaning that some creditors will waive your interest rate completely while others may reduce it to 2%, 5%, 8% or so. If you know you will not be able to make an upcoming payment, contact your counselor. Some creditors can work with you on a missed payment. Others will drop you from the DMP and return to charging you your pre-DMP interest rate.
If you are considering home ownership, some loan officers mistakenly believe that you must remove yourself from a DMP in order to qualify for a mortgage. If you remove yourself, the truth is that your creditors will increase your interest rates and your monthly payments back to previous levels, making it much less likely that you will qualify for a loan. The Federal Housing Administration guarantees many first-time home-buyer loans, and they do not consider your DMP participation if you have made 12 months of on-time payments.
Who Should Get Credit Counseling?
Credit counseling is a viable option for any consumer with excessive debts that include credit cards, store cards, collection accounts, medical debts, old utility and cell phone bills, and more. Although not able to address secured debts such as mortgages and vehicle loans, credit counselors help hundreds of thousands of consumers across the country every year to establish new repayment agreements with their creditors.
Whether you have $1,000 of high-interest debt or $100,000 or more of personally-guaranteed loans, credit counselors can help.
Credit counseling will generally help you lower your interest rates (and, consequently, your monthly payments) with your current creditors. You do need to have steady income in order to make your monthly payments.
The higher your current interest rates, the more you will benefit from credit counseling.
What Can I Expect From Credit Counseling?
When meeting with a credit counseling agency, you can expect to complete the counseling session with one or more of the following: A realistic and practical personal or household budget in place A debt reduction strategy, either on your own, through a credit counseling agency, or, in extreme cases, through a referral to a bankruptcy attorney A list of community resources to match your specific financial needs Free financial education programs, tools and courses to help you become more money fit
Is Credit Counseling Bad For Your Credit?
The persistent myth that credit counseling hurts your credit is found across many industries, from mortgage and auto lenders to banking and even financial planning. The truth is participation in a credit counseling debt management plan has not been a factor in your FICO credit score since the last century.
If you enroll in a credit counseling debt management plan (DMP), the creditors involved in giving you concessions on your interest rates and fee waivers have the option to place a notation on your credit report that you are participating in a DMP. The FICO scoring model does not factor this notation into your score. In essence, this notation tells other potential creditors that while you are paying off your past debt, they should refrain for extending additional debt that might make it more difficult for you to become debt free.
The reality is that very few creditors place this notation on their clients’ credit reports. Even with being enrolled in a DMP and the notation on your report, you can still qualify for a home loan or even a necessary car loan, usually after 12 months of on-time payments through the DMP.
While participating in a DMP has no direct, negative effect on your credit rating according to FICO, there may be indirect consequences, positive and negative, initially and over time.
Every client’s situation is unique, so any effect of participating in a debt management plan through a credit counseling agency varies widely. Any account you place on a DMP will be closed for further use. Closing accounts, depending upon how close your current balances are to your credit limits, may or may not have a negative effect on your credit rating.
However, as FICO explains, on-time monthly payments (whether through a credit counseling agency or on your own), combined with a consistent progress of lowering of your debt balances toward $0, will have a positive influence on your credit rating. Many credit counseling clients graduate their DMP with FICO credit scores in the 800 range (top 10%).
How Long Does Credit Counseling Stay On Your Credit Report?
If any of your creditors choose to place a notation on your credit report, it only remains there through the duration of your debt management plan. Once you have repaid your loan to that creditor, the creditor typically removes the notation from your credit report. If they fail to do so, a simple dispute through their home page will get it removed.
Once it is removed, there is no lasting indication that you were ever in a debt management plan through a credit counseling agency.
How Much Does Credit Counseling Cost?
Nonprofit credit counseling agencies do all they can to keep costs to clients as low as possible. Decades ago, credit counseling agencies were fully funded by the creditors whose clients paid off their debts through the agency. As the credit industry went through major changes in the 1990s and 2000s, funding decreased significantly.
In 2006, the US government added a subsection to the US code governing nonprofit (501(q)) that prohibits nonprofit credit counseling agencies from receiving more than 50% of their revenues from creditors. Consequently, the vast majority of nonprofit credit counseling agencies now charge an enrollment fee and monthly administrative fees to their clients in order to cover operational expenses.
The same US code also prohibits nonprofit credit counseling agencies from denying their services based upon the consumer’s inability to pay. However, if the consumer cannot make their monthly payments to their creditors, they are withdrawn from the DMP.
Many credit counseling agencies also have special discounts or waivers for our US military service men and women, guards men and women, veterans and reserves.
How To Choose A Credit Counselor?
When deciding to work with a credit counseling agency, trust should be a major consideration. How can you trust that the agency will management your debt as they promise?
Fortunately, you have many resources to help you in your decision. Obviously, the personal connection is important, but you should never respond a telemarketer or an email solicitor.
Here are four questions to answer before choosing to work with a credit counseling agency: Does it have an A+ rating with the Better Business Bureau? Does the agency belong to a national industry trade association? Has the agency been around for years, if not decades? Is the agency regularly audited by independent third parties?
You likely already know that the BBB tracks organizational reputations for how they treat their clients. Research the company’s rating at BBB.org, and make sure they have an A+ rating like Money Fit does.
Trade association membership matters. Make sure that the association to which the agency belongs promotes both best practices and regulatory compliance. As an example, Money Fit belongs to the Financial Counseling Association of America.
Do not work with a fly-by-night organization. As they say, “here today, gone tomorrow,” and you don’t want your money gone with them. Money Fit has helped hundreds of thousands of its clients become debt free since 1996.
Finally, make sure the agency has independent sets of eyes looking through the agency’s policies, practices, financial records and even public interactions. This confirms that the organization is doing what they say they are doing. Money Fit undergoes a meticulous financial audit every year with a third-party accounting firm. Additionally, Money Fit is certified compliant by BVQi NA, Inc. to the ISO 9001:2015 Quality Management System Standard.