Credit counseling is a valuable tool for individuals struggling with debt. It involves working with a credit counseling agency to create a customized plan to manage your finances and pay off your debt. Unlike debt resolution, credit counseling does not reduce the amount of debt you owe. Instead, it focuses on developing a strategy to effectively manage your credit and debt payments.
In some cases, credit counseling may be paired with a debt management plan (DMP), which may incur an additional fee. It's important to research credit counseling agencies before selecting one. Look for agencies with a good reputation and accreditation from the National Foundation of Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
By working with a credit counseling agency, you can gain valuable financial education and guidance to help you make informed decisions about managing your money and debt. With a customized plan in place, you can take control of your finances and work towards becoming debt-free.
Credit counseling is a valuable resource for those seeking to better manage their finances and repay their debts. Credit counseling agencies work with clients to develop personalized strategies for debt management, which may include debt management plans (DMPs).
If a credit counselor determines that a DMP is the best course of action, they will negotiate with the client's creditors for more manageable payment terms, such as lower interest rates or monthly payments. Once the DMP is agreed upon, the client will make a monthly payment to their credit counseling agency, who will then distribute the funds to their creditors on their behalf. The benefits of a DMP include reduced creditor contact and a more manageable repayment plan. However, DMPs typically take three to five years to complete, and clients may be required to give up their credit cards until the plan is finished. It's important to research credit counseling agencies thoroughly and choose one that is accredited by reputable organizations like the National Foundation of Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
It's important to be aware that credit counseling firms receive compensation from credit card companies based on your on-time payments. According to a CBS News report, these kickbacks are the primary source of income for debt counseling services. As a result, there may be a conflict of interest in the advice provided by credit counselors, as they may be incentivized to place you in a debt management program to earn more money from creditors. It's crucial to research and carefully evaluate credit counseling services to ensure they prioritize your financial well-being and provide unbiased guidance.
Consumer credit counseling agencies do not provide services related to alternate debt resolution options, so they often won’t recommend them as a choice, even if one is the smarter choice.
Positive Impacts
✓ Obtain Credit Scores & Report
✓ Aid in Financial Planning
✓ Additional Workshops
✓ Debt Management Plan
✓ Reduce Harassing Calls
Potential Cons
X Startup Fee & Monthly Fees
X Enrolled Accounts are Closed
X Principal Balances Don't Reduce
X Credit Score Will Suffer
X Potential Legal Action
According to estimates, around 25% of consumers who enroll in debt management plans (DMPs) complete them successfully. When choosing a credit counseling service, it's important to ask about their completion rate and be honest with yourself about whether you can afford the monthly payment they require. Taking these factors into account can help you make a more informed decision about whether credit counseling is the right option for you.
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