If you’re in debt, you are not alone. Consumer debt and credit rose 1.7% in the first quarter of 2022 to $15.84 trillion, according to the Federal Reserve Bank of New York.
Debt can be overwhelming, leading to a stressful lifestyle. It may be time to seek help from a credit counselor.
Credit counselors can help in the areas of money management, credit cards, budgeting, credit, and debt reduction. But finding a reputable credit counselor takes some research.
5 Facts To Consider When Choosing a Credit Counselor
1. Non-Profit Credit Counseling
Most reputable credit counselors are non-profit and offer services at local offices, online, or on the phone. But be aware that “non-profit” status does not guarantee that services are free. Some credit counseling organizations charge high fees, which they may hide; others might urge clients to make “voluntary” contributions that can cause more debt.
Most credit counseling agencies have reasonable fees; an enrollment fee and a monthly maintenance fee. These fees should be straightforward. The enrollment fee should run no more than $75, and the monthly maintenance fees should be cheaper – in the $30 to $50 range. There should be no fees if you are in a state of financial hardship.
The U.S. Justice Department provides a list of approved credit counselors by state to start your search.
2. Debt Management Plan (DMP)
The services credit counseling agencies offer includes debt management plans, which are designed to help people get out of debt quickly. But be wary of any company that immediately urges you to join a debt management plan.
Before entering into a debt management plan make sure your credit counselor has thoroughly gone through your debt, expenses, income, and assets. No one plan fits everyone. If you’re not careful you may find a company that will promise to ease your debt — but actually put you deeper in the hole.
Keep in mind that using a debt management plan may make it difficult to qualify for new credit. When you enroll in a DMP, you write a monthly check to a credit-counseling agency and the agency pays your creditors. Credit card companies may agree to lower their interest rates for people on a DMP so more of the payment goes to the principal rather than finance charges.
If you enroll in the DMP some credit card companies notify the credit reporting bureaus that you are paying through a third-party service. A comment stating that you’re paying an account through a credit counseling agency may appear on your credit report.
3. Shop around for an agency
With any other big decision, shop around. Be sure to ask for all prices and fees to be stated up front and put in writing. A reputable credit counseling agency should send you free information about the services it provides without requiring you to provide any details about your situation. A good place to start researching credit counseling agencies is at the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Once you’ve developed a list of potential consumer credit counseling agencies, check them out with your state Attorney General, local consumer protection agency, and the Better Business Bureau.
4. How will your credit score be affected?
Participating in credit counseling does not affect credit scores directly. Credit counseling may provide you with good financial management information and you may even attend classes to help you along the way. But when a debt is repaid through a debt management plan there will be an indication of credit counseling on your credit report.
Even though it might not impact your credit scores, for some lenders enrollment in a credit counseling program is perceived the same as if you had filed for a Chapter 13 bankruptcy.
Make sure the credit counselor clearly indicates how the debt management plan will impact your FICO scores. Different consumer counseling agencies may use different descriptions.
A non-derogatory notation like “Consumer counseling account” is neutral as long as the payment arrangements are maintained.
Obtaining new credit is unlikely during a credit counseling program. However, once you begin making payments via the agency, your credit score can improve because you will establish a history of timely payments.
Having a steady record of payments will likely help your credit scores rise if you’ve been delinquent in the recent past.
In some instances, the credit card company may re-age the account, which will show that you’re now in good standing. Plus, reducing your credit utilization ratio by paying off your credit cards will have a positive impact on your scores.
5. Will credit counseling help IRS debt?
Most credit counseling and debt consolidation agencies don’t include IRS debt and back taxes. These types of debt can be devastating in addition to credit card debt issues. CuraDebt is a debt relief company that offers a number of services including debt settlement, debt consolidation, and IRS debt settlement options.
CuraDebt’s in-house team negotiates your debt with each of your creditors. Once a settlement is reached, CuraDebt will request your input on the settlement terms and amount. Upon your approval, the account will be settled in full and you’ll pay CuraDebt an average of 20% of the settlement.