“A Comprehensive Guide to Credit Counseling: What You Need to Know”

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What Does a Credit Counselor Do?

Credit counselors offer guidance on managing your finances, whether it’s improving your credit, getting out of debt, or enhancing your budgeting skills. These professionals are often certified and have the necessary background knowledge and experience to provide personalized advice.

If you’re struggling to keep up with debt payments or need help figuring out your finances, here’s how a credit counselor can assist you.

Personalized Advice

Nonprofit credit counseling agencies typically offer free consultations where a counselor will discuss your financial situation and help you develop a personalized plan to improve your money management. Areas of focus can include:

• Developing a budget
• Managing bills and debts
• Accessing your credit reports and scores
• Improving financial literacy
• Escaping a paycheck-to-paycheck lifestyle
• Avoiding bankruptcy
• Creating a financial plan

If you’re considering filing for bankruptcy, the courts require you to complete a pre-bankruptcy credit counseling session.

Financial Workshops

If you’re not ready for a one-on-one consultation, you may attend workshops on various topics, including:

• Homebuyer education
• Budgeting
• Credit card management
• Maintaining a healthy credit history
• Bankruptcy
• Student loan counseling

Check with local credit counseling agencies to see if they offer a workshop that can help you with your specific questions or issues.

Debt Management Plans

If you’re behind on your monthly debt payments or worried about falling behind, a credit counselor may help you get on a debt management plan. The counselor can negotiate lower interest rates and monthly payments on your unsecured debt, primarily credit cards, and possibly get late charges waived.

In exchange, you’ll typically need to close your credit card accounts and make a monthly payment to the agency for all your debts, which it will distribute to your creditors on your behalf. Debt management plans usually last three to five years.

How Much Does Credit Counseling Cost?

Nonprofit credit counseling agencies typically offer consultation services and workshops for free or at a low cost. If you opt for a debt management plan, you’ll generally have to pay a one-time setup fee and a monthly fee throughout the plan period.

Fees for these plans are regulated by the federal government and the state in which the agency operates. The federal government caps the setup fee at $79, but some charge much less. Monthly fees are typically within the range of $20 to $40, but some may charge more.

Does Credit Counseling Affect Your Credit?

Attending a workshop or consulting with a credit counselor to get help managing your finances won’t impact your credit. However, if you enter into a debt management plan, your credit score may be affected in a few ways:

• Closing your credit cards can increase your credit utilization rate.
• If the credit counselor negotiates for you to pay less than what you owe, the account may be reported as settled, which can damage your payment history.
• Missing a payment by 30 days or more while transitioning into your debt management plan will show up on your credit report for seven years and impact your credit score.

Creditors may also add a note to your account on your credit report indicating that you’re on a debt management plan or that account payments are being managed by a credit counseling service. Future lenders can see this and may adjust their approval or terms based on that information.

How to Choose a Credit Counselor

Not all credit counseling agencies are created equal. While it’s recommended to work with a nonprofit agency, nonprofit status doesn’t guarantee free, inexpensive, or legitimate services. To avoid a bad experience, here are some steps to find a good credit counselor:

• Determine your needs. Some agencies may be better suited for you if they specialize in certain areas of financial management.
• Use a reputable starting point. Organizations like the National Foundation for Credit Counseling and the Financial Counseling Association of America provide lists of agencies that meet certain standards. The U.S. Trustee Program also offers a search tool for finding agencies that offer pre-bankruptcy counseling, among other services.
• Set up an initial consultation. Before providing your financial details, set up a preliminary meeting with a few credit counselors and ask questions about their certification, nonprofit status, services, costs, and other factors important to you.

Watch out for red flags during this process. For example, if a counselor pushes a debt management plan as your only option, claims they can remove accurate information from your credit history, gets paid on commission, or isn’t honest about costs, don’t hesitate to walk away.

Consider All of Your Options

If you want help improving your money management and financial literacy, a free consultation with a credit counselor can help you achieve your goals. But if you’re considering a debt management plan, weigh the potential drawbacks and whether you can accomplish your goal another way.

Take some time to research ways to pay off debt through debt consolidation, the debt snowball or avalanche method, negotiating with your creditors, and other options. If you’re considering a debt consolidation loan, Experian’s free comparison tool can help you get matched with offers based on your credit profile.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with expert advice and personalized service.

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