Credit counseling is a financial service that helps people manage credit card debt. They provide tools to help improve budgeting skills. And credit counseling strives to help people understand their credit better. Credit Counseling is usually offered by nonprofit credit counseling agencies, though some for-profit companies offer it as well.
Here’s what Credit Counseling generally involves:
- Free Initial Consultation
- A certified credit counselor reviews your income, expenses, credit report and assets.
- They identify problem areas—like high interest rates, missed payments, or overspending.
- Help you set and achieve financial goals such as becoming debt-free.
- Education & Guidance
- You learn about budgeting, saving, and credit management.
- Counselors explain debt repayment options, including the pros and cons of each.
- Debt Management Plan (DMP)(when needed)
- If your situation calls for it, they will likely suggest enrolling in a DMP.
- The agency usually obtains lower interest rates and lower payment with your creditors.
- You make one monthly payment to the agency, and they distribute it to creditors.
- Your accounts get closed. No more using these credit cards. Instead, you become laser focused on living within your means.
- Ongoing Support
- They monitor your progress, provide financial tools, and offer counseling sessions until you’re debt-free.
Key points to know:
- Cost: Initial counseling is often free. Debt Management Plans have setup and monthly fees.
- Impact on Credit: Talking to a counselor won’t hurt your credit, but enrolling in a DMP may temporarily affect your score. However, in many cases, clients who complete the program see their scores increase over time.
- Best For: People struggling with credit card debt, facing high interest rates, or barely able to afford the minimum payments.
Debt Management Plans
Debt Management Plans specialize in obtaining lower interest rates and payments on unsecured debts. Agencies that offer these DMPs work closely with credit card companies and personal loan providers in order to maximize your concessions.
A typical DMP allows you to become debt free in less than 5 years. However, some creditors offer further hardship plans to extend your plan up to 7 years. As a result of these hardship plans, your payment would be lower than the normal DMP.
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