Debt can get complicated, especially if you have a lot of it. Credit counselors are trained professionals who help individuals and families work to get a handle on their debt so they can lay a stronger financial foundation for the future. How does credit counseling work? Find out more below so you can make a decision about whether this is a tool you want to use.
Credit counseling is often promoted as the best option for consumers who are having trouble managing debt. In fact, the Credit CARD Act requires credit card issuers to publish, on card statements, a toll-free number for consumers to get credit counseling help.
Credit counseling is exactly what it sounds like: A trained and experienced financial counselor works with you to understand your debts and assets. They then help you work out a plan to deal with your debts or offer advice about what other options might be available to you.
This isn't a magic potion that dissolves your debt or improves your credit, though. Credit counseling requires you to be an active participant in the process. The counselor might help you create a budget, for example, but then you have to be willing to tighten your belt and follow the budget to make it work.
It’s also important to do your research to make sure you are working with a legitimate, certified credit counselor. Credit counseling is unlikely to help you if your credit counselor isn’t trained.
The exact process can differ somewhat depending on what organization provides the credit counseling and what your situation is. Here's a look at some common steps that you might be a part of when you seek credit counseling:
>> Learn how to choose a credit counselor
If you go through a nonprofit credit counseling service, the counseling itself is usually free. Even for-profit debt management companies often provide a free consultation to help you understand what your options are. If you work with your credit counselor to set up a debt management plan (DMP), you will make a monthly payment to your credit counselor who will pay your creditors on your behalf. These plans may come with a small fee as well.
Working with a debt settlement company is different and typically does come with some fees, though. A debt settlement company helps you negotiate payment arrangements with creditors that are satisfactory for both you and the companies you owe.
Whether or not you sought credit counseling isn't something that shows up on your credit report. So the act of credit counseling itself does not hurt your credit history or score.
However, some of the actions that are recommended by credit counselors might temporarily hurt your score. Settling debt, closing accounts, or adding new loans or balance transfer accounts that help you consolidate existing debt can all impact your credit score. In some cases, it might be that you're taking a short-term hit to your score to help improve your financial standing in the long run— but this is always something to consider carefully.
Whether or not credit counseling is right for you is a personal decision. However, the best candidates for this option tend to be people with a lot of revolving or unsecured debt who do have the income to be able to cover their debts. They just need help creating a plan and getting finances in order to be able to do so.
Credit counseling isn't the only way to get a handle on your debt. Here are some other options to consider.
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Does credit counseling work? It depends on your situation and how willing you are to stick with what the credit counselor recommends. You also need to be sure you're working with a reputable organization. Consider signing up for the Credit Report Card to keep an eye on your credit as you go through any type of debt management process.