Credit Counseling FAQ

Tweet

Many consumers find themselves in need of professional assistance to get a handle on managing their finances and to stay clear of problems with their unsecured debt. If this describes you, then you should consider contacting a credit counseling agency, also known as a debt management company. They can guide you in structuring your budget and managing your debts to your best advantage.

Photo by Philip Brewer.

1. What does credit counseling entail?

   After you have been assigned to a particular credit counselor, they will collect financial information from you so that they can get a good overall picture of your financial situation. Here are some of the financial details that they will need from you:

   • Your total monthly income from all sources
   • Your typical monthly expenses, in detail
   • The current balance on each of your accounts
   • The minimum payment on each of your accounts
   • The interest rate on each of your accounts

   After considering your finances as a whole, the credit counselor will customize a payment plan which is tailored to your circumstances. This proposed payment plan (or debt management plan) is then offered to each of your creditors, who in turn must approve it. Once a payment plan has been approved, the consumer makes a consolidated monthly payment to the credit counseling agency, rather than separately to each of their creditors. The agency then appropriates the correct amount to each creditor in keeping with the terms of the approved payment plan.

2. How do I know if I need credit counseling?

   There are certain key indicators which can serve notice to consumers that they probably would benefit from consulting with a credit counseling agency. Here are a few to watch out for:

   • You’ve had some late payments and the late fees are beginning to add up
   • You don’t have late payments, but you can see it starting to become a possibility
   • You have to transfer balances from one credit card to another to stay current
   • You find yourself taking out high-interest cash advances
   • You are anticipating that you might experience a hardship

   As an added note, according to the new bankruptcy laws of 2005, you must attend credit counseling before you will be eligible for filing bankruptcy.

3. How can credit counseling help with my debts?

   Credit counseling agencies work closely with the credit card companies in helping consumers to pay off the balances they owe. At the same time, they help the credit card companies collect money they are owed, and also to help avoid the costly consequences if the consumer were to file bankruptcy instead. Because of this close relationship, they usually have established contacts with your creditors who they can work with in getting better interest rates, forgive prior late fees and get your accounts back to “current” status for you.

4. How much does credit counseling cost?

   At a maximum, the fees you pay the credit counseling agency should be around 20% of your consolidated monthly payment. As a rule of thumb, your consolidated payment to the agency should be no more than (and hopefully less than) the total of the individual payments you were making before entering the program, interest rate reductions notwithstanding. After all, one of your goals in utilizing a credit counseling agency is to get some measure of payment relief. There are also non-profit agencies, but just make sure you understand that just because they are non-profit, it does not mean that all their services are free. Non-profit credit counseling agencies are regulated by the IRS due to their favored tax status.

5. Will credit counseling affect my credit score?

   Your credit report will reflect the fact that you are paying certain accounts through the use of a credit counseling agency. But this information is not taken into account when calculating your credit score according to Fair Isaac Corp. On the other hand, it may affect your ability to obtain new credit. Certain lenders may shy away from extending credit to you if they think that you may be struggling with your monthly bills, while others choose to interpret this information as a sign that you’ve taken responsibility for making certain that you pay your bills.

6. What if the credit counseling agency makes a payment error?

   In this unlikely event, the first thing you will want to do is contact the creditors who haven’t been paid as agreed and explain the situation to them. Be sure to also ask them how the damage can be remedied. Then you should contact your state Attorney General and the local consumer protection agency and inform them of the problem you experienced. You should also check (if you haven’t already) and see if the agency is listed with the Better Business Bureau. If they are, you can file a complaint against them through the BBB’s website. If the credit counseling agency is non-profit, you may want to contact the IRS as well.

Related posts:

1. Debt Settlement vs. Credit Counseling
2. How Consumer Credit Counseling Services Work
3. Stop Debt Collection