For some people, the best way to manage this stress and to pay off their debt is with consumer credit counseling. But is it the right answer for you? Consumer credit counseling is not the right answer for everyone (no single debt solution is). This article was written with the goal of helping you understand what consumer credit counseling is, what a consumer credit counseling agency does, and how it could help you get out of debt—so you can decide if it’s something you want to investigate further
First, let’s see if you are a good candidate for consumer credit counseling. Ask yourself:
- Are you current on at least one credit card?
- Can you afford your current monthly payments?
- If so, can you pay a bit more than the current minimums due on each of your debts?
- Do you have multiple accounts that each have a high interest rate?
If the answer is “yes” to any of these questions, then consumer credit counseling (with or without a debt management plan—often referred to as a DMP) could give you an easy-to-understand overview of your debt as well as a structured, effective method for putting that debt behind you.
How Consumer Credit Counseling Works
It’s important to understand that credit counseling, unlike debt settlement (also referred to as debt negotiation or debt resolution), does not reduce your principal balance—you will still owe the full amount of your debt. With credit counseling, you will get advice on how to manage your money, ideas and solutions that could help fix your current financial problems, and a personalized plan to help you budget and deal with your debt effectively. A credit counselor can also help you create a payment plan on your debts that you can afford.
Part of the value of consumer credit counseling is that it helps teach you better financial habits so that you can solve your debt problem now, and hopefully prevent yourself from getting back into debt again in the future.
What is a Debt Management Plan? (DMP)
A debt management plan (DMP) goes beyond consumer credit counseling by giving you a structured program that helps you pay down your debt through monthly payments. Your debt management plan is personalized to you. A credit counselor will look at all of your enrolled debts and then work with creditors to see if they will give you a lowered interest rate, known as a “concession rate.” Then the amount of your single monthly payment to the debt management plan will be based on the new concession rate(s).
It’s important to note that in a debt management plan, you don’t pay your creditors directly. Instead, you pay the DMP each month and they will use this money to distribute payments to your creditors. Through this method, you will be paying back 100 percent of the debt, plus interest.
Depending on your debts and how much you can afford to pay each month, it can take about 36-60 months to repay debts through a DMP.
The Advantages of Consumer Credit Counseling
- One monthly payment: Credit counseling works as a debt consolidation tool as all of your enrolled debts will become combined into a single monthly payment—this can make it simpler for you to regain control of your finances.
- Lower rates and fees: It can save you money in interest as, moving forward, the interest rate should be lower than the combined average of your previous interest rates.
- No collection calls: Enrolling in a DMP through a consumer credit counseling agency may help protect you from creditor collection actions as well as prevent you from becoming delinquent on your debts.
The Downsides of Consumer Credit Counseling
- Lenders may view you as credit risk: While working with a consumer credit counseling agency along with enrollment in a DMP will not hurt your credit score directly, it could be noted on accounts on your credit report that they are being paid through a credit counseling program or DMP. Since some lenders view people enrolled in DMPs as a credit risk, it could impact your ability to open and use additional credit lines.
- Credit card accounts may be closed: Some, or all, of your credit card accounts may be closed and you will be paying a monthly fee for credit counseling service as well as paying back 100% of your debt and its accumulated interest.
- Principal debt not reduced: Understand that if you are having a hard time making the minimum payments and aren’t comfortable with the fact that credit counseling may require you to pay even more each month, then this may not be the right option.
Finally, while consumer credit counseling can help you pay off your debts at a lower rate, you will still be paying the entire debt amount plus interest, plus fees if you choose to work with a DMP. That’s not necessarily a downside, but there are other debt relief solutions, like the debt settlement program offered by Payment Genius, that can help you become debt free without having to pay the entire amount plus interest and creditor fees. Learn how our negotiators work with your creditors to reduce what you owe.
You’re putting your financial life in the consumer credit counseling agency’s hands, so you should take as much time as necessary to confirm that they have a good reputation. This is a major financial decision, so you should research your options thoroughly and compare companies.
Go online and research agencies that offer their services near you as well as online agencies. It’s up to you whether you want to work with a person you can talk to face to face or if online service fits your schedule and needs best.
Look for reviews from other consumers to find out if these companies have good customer service and are trustworthy. You could also ask for referrals from friends and family. Some companies offer such referrals as part of their employee benefits—your employer may be one of them, so you can explore that option too. Don’t let embarrassment hold you back from getting recommendations—you may be struggling with debt, but you’re working to find a solution, and that’s something to be proud of. As you search for a consumer credit counseling agency, be sure to:
- Check with the Better Business Bureau to see if the agency has had any complaints, and, if so, ensure that all of the complaints have been favorably resolved.
- Make sure they are licensed in your state and accredited. Accredited agencies will employ certified counselors and have strict guidelines concerning data security and customer service.
- Make sure the credit counseling company offers financial education on top of the debt consolidation and payment services. The goal is help you become—and to stay!—debt free.
When you narrow your search and start to talk to the consumer credit counseling agencies that look good to you, note that the first counseling session should be free. During that session, the counselor will go over your entire financial state of affairs with you. They’ll help you calculate your monthly income and expenditures, and brainstorm ways for you to make more money and spend less. Your counselor will also review your credit card debts, their interest rates and terms, and your payment histories.
Be aware that not all agencies with a “non-profit” status are legitimate. This status doesn’t automatically mean that the agency’s services are free of charge, and they may, in fact, charge high fees that are not immediately obvious. Make sure you ask about any additional fees or costs associated with whatever solutions they recommend so you get a clear picture of what you’re dealing with.
Once you find a consumer credit counseling agency you trust, review the written agreement carefully before you sign on the dotted line. The agreement should clearly outline the consumer credit counseling agency information, what services they will be providing you (as well as what services they won’t provide for you), what’s required of you in terms of payment for service fees, plus how long the program will take. And if any guarantees are offered, these will be listed in detail within the contract as well.
Remember, this is a partnership. A credit counselor will help you, but you have to make sure you do your part and follow up to ensure they work hard on your behalf. Once the program begins, don’t assume everything is being taken care of. Stay an active participant, and confirm with your creditors that your payments are being received.
8 Warning Signs to Watch For
Unfortunately, many consumer credit counseling agencies have poor reputations, so it’s important to put in the extra time and effort required to make sure you select an agency that is going to treat you right and provide the services you need to get out of debt. Move on and keep looking for the right debt partner if a consumer credit counseling service does any of these things:
- Suggest that you not contact a credit bureau
- Require you to pay for consumer credit counseling before the start of services—the first consultation should be free of charge
- Recommend you dispute all information in your credit report, even if you know it’s legitimate
- Tell you to get an Employer Identification Number (EIN) instead of using your Social Security Number (SSN) on credit applications
- Advise you to make up a new credit identity—this is illegal, it can be considered fraud, and you could be prosecuted
- Charge fees so high (30% or more) that they will likely contribute to your debt
- Not inform you of your legal rights
- Not explain what you can do for yourself without having to pay a service fee
Not sure if consumer credit counseling is the right choice for you?
Still not sure if consumer credit counseling is the right choice for you? It’s OK to be confused. Being in debt can be stressful, and sometimes searching for the right way to get out of debt can be overwhelming and confusing. Every day, we here at Payment Genius talk to people who are stressed, worried, and even embarrassed about their debt. But there’s nothing to be embarrassed about. Bad debt happens to good people, and what matters most is that you are making an effort to put your debts behind you. If you don’t know what to do to solve your debt problem, we are here and we are happy to help point you in the right direction.