There are times when life throws financial fastballs straight through your strike zone into the catcher’s mitt. The good news is you can learn to hit these pitches with a bit of coaching. On the other hand, you also have to know what trouble looks like to recognize the fact that you may be in need.
To this end, it helps to understand what credit counseling agencies do.
So, let’s take a look.
What Is a Credit Counselor?
Perhaps the most significant benefit of working with a credit counselor is the opportunity it presents to learn to manage your money. Creditors can help consumers find solutions to existing financial problems, develop personalized plans to help them budget or deal with debt and even create structured payment plans.
In other words, a credit counselor can introduce you to better financial habits to enable you to solve your current problems and prevent new ones from occurring in the future.
Credit Counseling and Your Credit Score
Credit counseling can generally be accomplished while leaving your credit score intact. Simply put, if your credit history is positive, credit counseling could often help you keep it that way.
However, you won’t be able to use or open unsecured accounts, like credit cards, while participating in a debt management program through your credit counselor (which you shouldn’t anyway). You may be able to purchase a car, or buy a home, if the need arises — assuming your credit history qualifies you to do so.
What Does a Credit Counselor Do?
A credit counselor will conduct an assessment of your financial situation, like measuring your income against your obligations to evaluate your ability to repay your debts. You’ll likely receive a series of budgeting and repayment tips if it’s determined you have sufficient cash flow to satisfy your obligations. Counselors also provide a host of materials and literature to help you understand how debt works and learn to manage your money most effectively.
A visit with a credit counselor should boost your overall financial literacy, to start.
Debt Management Programs
You may be offered the option of entering a debt management program (DMP) if it’s determined your debts have the potential to overwhelm your income. Should you elect to do so, the counselor will contact your creditors to negotiate the interest rates and fee concessions to help you clear up the debts sooner.
Rather than paying your creditors directly, you’ll pay into a DMP fund each month. The counselor will pay your bills from that account. This gives you one payment to make each month, the amount of which will be determined by the total outstanding balance of all of your obligations, once the concessions are factored out.
And yes, you’ll pay a regular fee for this service.
When Do You Need Credit Counseling?
Most people can learn something from meeting with a credit counselor at a non-profit agency.
The following factors may mean you’re a good candidate for credit counseling plus DMP:
- You’re carrying a minimum of $5,000 in unsecured debt. If you owe less than that, use a DIY solution.
- You have a steady income stream.
- Accounts are still with the original creditor (not in collections).
- Credit card debt comprises the majority of your problem.
In addition to the structured repayment of your debts, the primary benefit of credit counseling is the fee and interest concessions. Thus, credit card debt lends itself most readily to being addressed in this fashion.
Remember, going this route pays your debts in full — albeit at lower interest rates and with fee concessions. This is a great way to go if your situation qualifies you. After all, you can resolve a potentially negative financial situation while preserving your credit score.