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February 04, 2020 | money-management

How Consumer Credit Counseling Can Help You Get Out of Debt


Between student loans, credit cards, and other forms of borrowing, it can be easy to get trapped under a significant debt burden. Unfortunately, scammers prey upon people in this vulnerable situation, worsening adverse conditions. Luckily, there is a legitimate option available to folks in this situation who need a little help getting their finances under control— consumer credit counseling. 

What Is Consumer Credit Counseling?

Consumer credit counseling agencies are nonprofit organizations that operate to help individuals and families find solutions to financial struggles. The resource is typically free and can provide you with the tools or resources needed to get your financial situation under control.

Consumer credit counseling shouldn’t be confused with debt settlement companies. Unlike credit counseling, debt settlement companies are typically for-profit businesses that charge fees for their services. These services include arranging settlements of debts with creditors and debt collectors.

Consumer credit counselors are professionals trained in the areas of budgeting, consumer credit, and money and debt management. Their services are useful for anyone that is finding it hard to pay off debt or get a handle on their overall financial health. 

What Happens in a Consumer Credit Counseling Session?

The first step in consumer credit counseling is getting paired with a certified credit counselor. You’ll speak with your counselor on the phone, online, or in-person who will get to know you and assess your financial situation. Be prepared to answer questions about the economic challenges you’re facing, as well as the goals that you’d like to meet. It’d be helpful to have the following documents or info handy to answer the counselor’s questions:

  • A list of current expenses including what your household spends on food, utilities, loans, and other regular bills.
  • Estimates of monthly income or pay stubs.
  • Credit card statements that can provide due dates, balances, etc. 

Based on your conversation, the counselor will offer potential debt solutions and feedback on how to best address your issues. A credit counselor may:

  • Assist you in constructing a budget.
  • Help you obtain a copy of your credit report.
  • Advise you on managing debt and money.
  • Point you towards more educational material or resources.
  • Build a management plan for student loans or credit card debt.

Debt Management Plan

One of the things a counselor may do is help you develop a money management plan. A counselor will negotiate with your lenders to get a repayment extension, lower interest rates, or waived fees. They will not decrease the total amount owed but will get you more favorable repayment options.

Instead of paying your lender, you’ll make a monthly payment to the counseling organization who will then pay your lenders. Debt management plans shouldn’t be your first option and are typically suggested after other methods have been exhausted.

Where Can You Find Consumer Credit Counseling?

You can find reputable consumer credit counseling over the phone, online, and even in-person. The Consumer Financial Protection Bureau recommends starting your search with the Financial Counseling Association with America or the National Foundation for Credit Counseling.

Texas-Based Credit Counseling

If you’d prefer to work with a Texas-based counselor in person, you have options. The United Way of Austin has a great list of Central Texas resources, including:

There are several organizations out there, each offering a variety of services. Before choosing one, do a little research to find one that fits your specific needs.

How Can You Avoid Scams When Looking for a Consumer Credit Counselor?

As we mentioned earlier, there are scammers out there looking to take advantage of people in vulnerable financial situations. The Consumer Financial Protection Bureau has compiled a list of questions to ask to choose a credit counseling organization that’s right for you. Keep an eye out for the following red flags to avoid identity theft and to pay money to a fraudulent organization.

  • They Ask for Info Upfront. A legit credit counseling agency should send you free info about the services that they offer without wanting your financial details.
  • They Charge for Their Services. The Consumer Financial Protection Bureau advises against using companies that charge for information and educational materials. 
  • They Contact You First. If you receive unsolicited phone calls or mail about debt relief services, it is likely a scam. A reputable organization will not contact you first.
  • Employees Are Paid More if You Sign Up for Certain Services. If an employee is trying to push an individual plan on you without thoroughly evaluating the situation, it could be because they are paid more to do so.

How Does Consumer Credit Counseling Affect Your Credit Score?

You may have heard that consumer credit counseling negatively affects your credit score. According to Experian, one of the three major credit reporting bureaus, participation in a consumer credit counseling program is not reflected in a credit report. However, debt management plans are. Since they involve negotiating lower repayment amounts and interest rates, they will show up on your credit history.

Even then, it isn’t guaranteed that a debt management plan will affect your credit score. This depends on the status of payment on your accounts. A lender may report the situation as current or paid-in-full.

If this is the case, your credit scores may not be impacted. However, if it is reported as settled, meaning that you’ve paid less than what was initially agreed upon, your score is going to take a hit. To avoid any hits to your credit score, make sure that you don’t miss any payments from when you enter a debt management plan. It’s especially vital that you stay current during the transition.

On the flip side, getting your finances in order with consumer credit counseling will help you boost your credit score over time. Anytime you take steps to improve your overall financial situation, you work towards building that three-digit number in the long run.

Conclusion

It's important to remember that you do not have to tackle outstanding debt alone. There are organizations available to consumers that can help them built their long-term debt management plan. Be wary of companies offering quick overnight solutions, as the road to financial health usually takes time.

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