What is Credit Counseling?

Credit Counseling is a process that involves offering education to consumers about how to eliminate debts that the consumer can’t pay by themselves.  Typically a Credit Counseling Agency, either for-profit or non-profit, represents the consumer and renegotiates payment terms with the creditors of the consumer.  A debt management plan and budget are then set to help the consumer pay the creditor.

Pros of Credit Counseling

• The consumer doesn’t have to worry about negotiating with creditors, the agency takes care of this for you.
• Because you are now in a “plan”, your creditors may accept lower payments (10-20% reductions are common).
• Interest rates can be negotiated lower.

Cons of Credit Counseling

• Your credit history will be damaged.  Most mortgage companies will not allow you to refinance for a certain time period after participating in credit counseling.  From a credit risk perspective, it is commonly equated with filing a Chapter 13 bankruptcy.
• You are responsible to pay income taxes on the balances that are forgiven by your creditors.
• Your accounts are closed.  During the renegotiation process your creditors will close your accounts as part of the plan so you no longer will be able to use your credit cards.
• Only credit cards can be included in credit counseling.  Mortgage loans, Auto Loans, etc are not included in credit counseling.

Who Should Participate in Credit Counseling?

• You may be a good candidate for credit counseling if you cannot afford your credit card payments and you have no other options.  Credit Counseling is typically a last resort before filing for bankruptcy protection.

More Information on Credit Counseling

If you are considering credit counseling program be sure to spend some time researching your options before signing up with an agency that you do not know much about.  Most people are not familiar with their options and the programs that are available, and when money is tight, emotions are usually running high, and it’s easy to make a bad decision.

There are many credit counseling agencies to choose from.  Knowing what to look for is key to your success.  Reputable agencies will provide you information up front about their company without you having to provide any of your own personal identifying information.

Your task in choosing the right agency is to be sure that you do your homework. Here are our recommendations:

• Interview at least two agencies.
• After you receive your initial consultation, contact the Better Business Bureau or your State Attorney General to see if there have been any unresolved complaints on the agency.
• Be sure the agency is charging you reasonable fees (not more than $50/month for a debt management plan).
• The credit counseling agency should be non-profit.
• The agency should have been in business for at least five years.
• The counselors at the credit counseling agency should be certified by an independent organization.
• Make sure the agency is accredited.  The two major evaluating agencies are the International Standards Organization (ISO) and the Council on Accreditation (COA).
• The agency should be a member of one of the trade associations: either the Association of Independent Consumer Credit Counseling Agencies (AICCCA) or the National Foundation for Credit Counseling (NFCC).
• The agency should be licensed and bonded to do business in your state, this is an absolute requirement for your protection.
• The agency should be willing to waive or lower fees if you simply can’t afford them.
• The agency should spend a reasonable amount of time on your initial consultation. At least an hour is needed.
• The agency should provide you with a written budget based on your personal financial situation.

One of the most important points is to be sure that the agency offers free education to help you learn how to manage your finances. They should also provide you free ongoing education whether you are enrolled in the debt management program, or if you decide that the program is not right for you.

If an agency is not willing to answer your questions or if you feel that the answers are not satisfactory, call someone else.