What is Credit Counseling & How It Can Help You Reduce Debt Problems?

Getting out of debt without any expert help or advice isn’t for everyone. If you find yourself under some kind of debt, there’s no reason to feel discouraged. Most people need a helping hand to walk them out of their debt. So when you’re seeking help from an outside source to alleviate your financial burden, almost always look for non-profit agencies first.

As per the two major non-profit credit counseling trade associations – the National Foundation for Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA) – a near eight million people sought help from their member agencies in 2009. You’re definitely not short of company, there are plenty of debt-stricken people like you in need of help.

What does a credit counselor do?

Credit counseling (known in the United Kingdom as Debt counseling) is commonly a process that is used to help individual debtors with credit card debt settlement through education, budgeting and the use of a variety of tools with the goal to reduce debt.

What is the purpose of credit counseling?

Credit counseling often involves negotiating with creditors to establish a debt management plan (DMP) for a consumer. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor.

Related – Which Are The Best Ways To Consolidate Your Student Loan Debt?

How Can Credit Counselor Help You Reduce Debt?

Let’s take a look at how non-profit credit card specialists and counselors can help you:

1) They can offer you a free counseling session

Before making you sign up for anything, a lot of nonprofit credit counseling agencies will first spend a good 60-90 minutes with you in an attempt to get an in-depth understanding of your debt situation and overall financial position.

While this upfront consultation service is mostly provided free of cost, some reputable firms may charge a nominal fee, usually less than $100. Very often their welcome remarks are something like – what brings you to them today?

Followed by a keen inquiry of your short and long term goals. What this does is opens up your mind beyond merely focusing on the immediate hurdle of getting out of debt. They actually encourage you to think about a brighter future.

2) They try to give you straight facts about your financial reality

Counselors like to get the gist of your current financial situation, which obviously requires them to ask details about your earnings and expenses.  They’ll pay a very close attention to your debt, the amount owed by you, the interest rates that you’re paying and how much is wasted upon late fees and over the limit penalties. After they’ve carefully examined these fact, they’ll try to ascertain what’s the best option for you, which entails deciding between such scenarios as changing your financial habits or enrolling you in a Debt Management Plan.

3) They’ll Help Create a Spending plan or Budget for you

If you’re trying to pay down your debt, it’s essential that you create a Spending plan that allows you to live within your means. Creating a Spending plan is a crucial part of a non-profit counselor’s job. After carefully examining your spending pattern, they’ll make recommendations as to where you should try to cut back in order to gain proper control over your finances.

4) They’ll work with you on secured debts as well as Credit Debt

A good counselor, yes it appears we can’t do without this adjective and hence the constant repetition. So a ‘good counselor’ will review both your secured and unsecured debt. The former will include your collateral such as a mortgage, while the latter, mostly the credit card debt.

Obviously the foremost priority will be to place you in a situation where you’re still able to purchase groceries, keep the lights on, and pay off your rent or mortgage. Once that has been determined, they’ll try to find the best way to deal with your credit card debt and any other unsecured obligations.

5) If it makes sense – They may recommend a DMP

Under a Debt Management Plan your credit counselor tries to negotiate with your creditor to reach an agreement that allows you to get out of debt within the next three to five years. In last few years there have been millions of cash-strapped credit card holders who’ve enrolled in such plans. In most instances a DMP will:

  1. Create a three to five years plan to get you debt-free
  2. Lower the interest rate on your debt to make it easier for you to pay it – it’s mostly below 10% but could be much lower at times.
  3. Prevent your credit card company from charging you over the limit fees, annual membership fees, and a late payment penalties.
  4. Freeze your credit card account until you’ve fully paid off your balances. A number of credit card companies even close your account and ask you to apply for a new card once your debt has been paid off.

With that said, it must be noted that a dignified nonprofit won’t recommend a DMP to just about everyone. As per the National Foundation for Credit counseling, 1 out of every 4 people are able to sustain a DMP. The simple fact is that a DMP won’t help you if you are failing to make payments even when your interest rates are reduced or your penalty fees have been waived.

6) They’ll let you know should there be a need to file for Bankruptcy

According to the NFCC, near about 10% of all credit counseling clients should consider bankruptcy. Any good credit counseling agency will inform you if you fit in that 10%. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you can’t apply for bankruptcy without first working with an approved credit counseling agency and a good counseling agency normally provides you with legally required pre-filing counseling. However, it will stay clear of pushing you to use a particular bankruptcy lawyer.

7) They’ll gladly let you know their fees

Any reputable credit counseling agency will happily let you know their fees up front and put it in writing. Usually they don’t charge anything for the first appointment. If you enter a DMP, you’ll have to pay a monthly fee which should be just about nominal – probably $50 a month or maybe even less.

Still, if you can’t afford to pay that either, most credit counseling agencies won’t turn you away. Both the NFCC and AICCCA membership guidelines clearly state that consumers can’t be denied service based on their inability to pay.

Surely the road to financial freedom is a long and arduous one. If you feel you’ll need some outside help to come to your rescue, and get your finances back on track, then you definitely have to find the right agency for yourself.