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A nationally certified counselor will work one-on-one with you to determine the best options for your situation. They'll educate you on how you can establish a budget, lower your bill payments, and design a realistic plan to repay your debts. Credit counseling services also offer Debt Management Plans, or DMPs. In a typical DMP, your unsecured debt is consolidated into a single, affordable monthly payment, often at reduced interest rates, which can save you plenty. If you're looking to regain control of your financial situation, credit counseling can help you. Counseling sessions are free, and there's never an obligation to enroll in an agency's plan.
How much could you save through a credit counseling agency's debt management plan?
Everyone's situation is different, and debt management plans aren't appropriate for every case, but here are the average savings experienced by credit counseling clients at one major agency:- The typical client's credit card interest rates were reduced from an average of 22% to 8%, saving them roughly $186 in interest every month in their first year of enrollment. This gives them the breathing room they needed to stay current on other bills and start saving money again.
- The agency's typical client enrolls a total balance of $22,100, spread over 5 accounts. By paying down those accounts at reduced rates, the client can save $5,288 in interest over their enrollment.
- The typical successful DMP clients took 42 months to complete their debt management plan. Some finished earlier by applying a tax refund or similar windfall to their scheduled payments, but it's not necessary.
How does credit counseling work?
When you call a credit counseling agency, you'll be connected with an independently certified counselor who will provide you with a thorough financial analysis. The analysis is free, and it's necessary so your credit counselor can find out exactly where you stand. Afterward, he'll offer you advice appropriate to your situation, with no obligation to become a client. Your credit counselor can even help you develop a plan that you can implement on your own.If you're given the option of enrolling in a debt management plan and you decide to do so, the agency sends payment proposals, based on your budget, to your creditors in an effort to secure interest rate reductions, fee waivers, and any other account benefit that might be appropriate. Afterward, you'll make one monthly payment to the agency, and they'll distribute the proper amount to each creditor. You'll also receive support throughout your enrollment, including access to educational websites, free financial guidebooks, a variety of online payment calculators, and periodic check-ups to help you manage the plan you've created and avoid future difficulties.
When should you consider credit counseling?
You should consider contacting a non-profit credit counseling agency if any of the following describes your current situation:- You've fallen behind on your bills and can't catch up, due to late fees and other charges
- You can't afford to make more than the minimum payments on your credit card bills due to high interest rates
- You've been living paycheck to paycheck, and can't find any room in your budget
- The balance on your account is close to your credit limit
- You're tired of struggling to make your payments every month, and you need a plan to start achieving your financial goals
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How can credit counseling help you pay off your debts?
Credit counseling agencies employ counselors who can help you identify areas of your budget where you can save money and eliminate waste. They'll also work with you to create a personalized action plan to help you prioritize and pay off your debt. In some situations, one of the options they may offer is enrollment in a Debt Management Plan, or DMP. A Debt Management Plan allows you to consolidate your unsecured debt into one simple monthly payment. Not only is a DMP convenient, it can represent a substantial savings in interest payments over time. Credit counseling agencies have relationships with creditors all across the country. These creditors understand the challenges you face and offer concessions to people seeking non-profit credit counseling assistance. The benefits you receive through a Debt Management Plan typically include.- Lower monthly payments
- Reduced interest rates
- Elimination of late or over limit fees
- Financial education
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How much will credit counseling cost?
You might think that, because of all the expert advice you'll receive, credit counseling is expensive. The great news is - it isn't. You'll be dealing with non-profit agencies that secure funding from a variety of sources that support your educational and charitable mission. Your counseling sessions are free. The financial assessment you receive, the suggested strategies to minimize your expenses and the action plan personalized for your situation are all provided for free.If your financial assessment indicates that you could benefit from enrollment in a Debt Management Plan and you decide to enroll, you may be charged modest fees. These are typically structured on a sliding scale that's based on your ability to pay. They are also governed by law in many states, which often cap any initial and monthly fee in recognition of the simple fact that financially troubled people shouldn't pay high fees.
At one agency, their typical credit counseling client pays roughly $35 to enroll, and $25 per month for the agency's services. During 2011, 18% of their new clients paid a reduced initial fee, while 12% paid nothing to enroll.
Even better, 31% paid a reduced monthly fee, and 4% received full waivers. Even when the agency's fees are factored in, the average client who enrolled in the agency's debt management plan during 2011 is projected to save approximately $5,288 in interest over their term.
Will credit counseling affect your FICO credit score?
Here's how FICO, the agency that created the most widely used credit scoring formula, responds to that question:"Using a credit counseling service and having this situation reported in your credit report should not have any negative impact to your FICO score. However, - any late payments occurring either before or after you began the plan may be regarded negatively."
In the FICO scoring system, credit counseling is officially a neutral mark on your credit report, and receiving a free financial analysis from a credit counselor has no impact whatsoever on your credit score. You're simply having a conversation and receiving advice and assistance. If you choose to join a Debt Management Plan, your credit score will be impacted because the accounts you enroll will be closed. That's the trade-off many creditors require in exchange for reducing your interest and waiving your fees as you pay off your balance over time. That's a reasonable expectation. Ultimately, if you follow through on your plan without taking on additional debt, you'll be working to put yourself in a better financial position, which is probably why you're doing this research.
Look at it this way, it wouldn't seem logical if your couch was on fire and you were hesitant to throw water on it for fear of ruining the fabric. Well, if a Debt Management Plan is an appropriate option because you're drowning in credit card debt, why would you shy away from a strategy that could give you some breathing room? If you're struggling with debt, probably the last thing that should be on your mind is your score. You should be thinking about regaining control of your situation.
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Will enrollment in a debt management plan affect your ability to obtain new credit?
That can't be predicted. Every creditor looks at credit counseling differently. On your credit report, a credit counseling notation is officially considered neutral. Nevertheless, some creditors may perceive the mark negatively, while others may be comfortable with the fact that you're addressing your situation and repaying your debt every month. If you're an appropriate DMP candidate, there's a strong possibility that you're already overextended and would find it difficult to repay your creditors at your current rates in a reasonable timeframe. As your balances are paid in full through the program, your debt-to-income ratio should improve, providing you don't take on additional debt in the meantime.^Top
How long will it take to complete a credit counseling program?
A debt management plan is typically structured to help you repay your debts in a time-frame of between 3 and 5 years. At one major agency, the average was 53 months, but, interestingly, clients who completed their program did so in an average of just 42 months. Generally speaking, if you follow through on the counselor's advice, you could reduce your projected term. If you add more accounts to your DMP during that term, your time-frame may be extended^Top
Why would the creditors agree to the repayment plan proposed by your credit counselor?
The most obvious answer is yes, because they know that repayment plans can work. By helping the mutual clients improve the way they manage their own money, restoring payment discipline (often while achieving significant savings in fees and interest), the credit counseling company helps create happier, appreciative consumers.Second, it would be difficult for your creditors to offer the same services that a credit counseling agency provides. Creditors are primarily focused on their own clients, and to act as an intermediary between you and all of your other creditors would be time consuming. Furthermore, your creditors aren't prepared to provide you with the personalized counseling, advice and education that you'll receive from a non-profit agency. Due to the sensitive nature of the work, credit counseling agencies are highly regulated and must adhere to a high level of professional ethics - a comfort to both creditors and clients.
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What should you do if you discover an error with the bills paid through your counselor?
If you encounter any issues during your time on a Debt Management Plan, you should call your credit counseling agency immediately. Each month, thousands of people across the country enroll in debt management plans. Each agency must coordinate with multiple creditors, and human error sometimes occurs. Because so much rides on your success, credit counseling agencies employ customer service specialists who will work to resolve any issues that may arise. (Be sure to read the membership package you'll receive, which will include phone numbers and addresses, agency-specific policies, and other information you may need during your enrollment.)
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