Ultimate Credit Counseling Guide

This is Chapter 1 of 5 in our Ultimate Guide to Debt Relief series.

One of the joys of adulting is managing your finances. Credit counseling can help you get a handle on your finances and manage them better. Credit counseling is one option when trying to get out of debt.

If you feel like your finances are beyond your control or if you’re dealing with debt that seems impossible to pay off, reviewing your finances with your credit counselor can help you successfully gain control of your finances and understand your options.

“Most people don’t know what to do when their debt gets out of control and should shop around to make sure they don’t fall into a scam,” says Daniel Rodriquez, director of operations at D.R. Hill Wealth Strategies, LLC.

Here’s everything you need to know about credit counseling before you start:

• What is credit counseling?
  • How does credit counseling work?
  • How does credit counseling affect your credit?
• Who needs credit counseling?
• What are the benefits of credit counseling?
• What makes a good credit counseling company?
• What red flags should I watch out for?
• What’s the difference between credit counseling companies and credit repair companies?
• What’s the best way to prepare for a credit counseling appointment?

What is credit counseling?

Credit counseling is one way to get financial advice tailored to your situation. Credit counselors can help you create a budget, make a plan to pay off debt, and evaluate your credit report and credit score. Sometimes credit counseling agencies offer free workshops on personal finance.

“A credit counselor is only the first step forward in resolving your debt or financial concerns. They will guide you and give you the resources to get out of the hole, but it's up to you to put things into action,” says Jared Weitz, United Capital Source Inc CEO and Founder.

Most credit counseling companies offer these services for free. One paid service these companies offer is a debt management plan. If you enroll in a debt management plan through a credit counseling company, you can expect them to work with your creditors to lower interest rates and waive fees. Ultimately, this will make it easier to pay off your debt.

The credit counseling company will also manage your monthly payments for you, so all you have to do is make one large monthly payment. The company will then disburse the funds to your creditors.

Enrolling in a debt management plan typically involves a one-time enrollment fee and a monthly charge for managing your payments.

How does credit counseling work?

Whether or not you’re having trouble managing debt, meeting with a certified credit counselor can help you get a better handle on your money. The first step is scheduling a free consultation. At the consultation, the credit counselor will review your finances and help you make plans to manage your money better.

“Credit counseling won’t provide you with a hands-off debt solution. Instead, you’ll typically talk with a financial professional who will help you find a way to tackle current debts and devise a budgetary approach that should help you keep out of debt in the future,” advises Sean Messier Credit Card Insider credit industry analyst.

How does credit counseling affect your credit?

Credit counseling generally has no effect on your credit. However, creating and implementing a plan to pay off debt and meet your financial obligations can help your credit score.

Credit scores are calculated based on your current accounts, current credit card usage, and your history with both.

When scoring companies consider the history of your accounts, they look at how consistent you are with making payments on loans and credit card bills. Becoming more consistent and paying off your current debt obligations has a positive impact on your credit score over time.

Who needs credit counseling?

Since credit counseling primarily focuses on financial education, anyone can benefit from it.

“If you are opening your first credit card, need to manage student loans or a mortgage, and looking to make a long term financial play, credit counseling is a good option for you to pursue,” suggests Weitz.

A credit counselor can help you understand your financial obligations and make plans to manage your finances well. Credit counseling can be especially helpful if you don’t feel like you have a handle on your debt.

“Someone who is looking to pay off all their debt without ruining their credit score would seek out a non-profit credit counseling agency. These often have an education component to them as well, so clients can learn better money management skills during the credit counseling session,” says Katie Ross, Education and Development Manager for American Consumer Credit Counseling.

Credit counselors help you assess your finances and understand your options for dealing with your debt.

“Credit counseling could be a beneficial move if you’re struggling with debt management in any capacity, especially if there are free services available in your area.

If you’re considering a more drastic approach to your debts, like bankruptcy, credit counseling is an essential first move,” adds Messier.

What are the benefits of credit counseling?

Credit counseling offers several benefits, including increased financial literacy, budgeting assistance, and reviewing your credit report.

Credit counseling can also help you make a plan to pay off debt and become debt-free. Taking advantage of a credit counselor’s help in crafting a plan you implement on your own or using a credit counseling company’s debt management program can be beneficial if you are trying to get a handle on your debt.

Even if you feel good about your financial situation, it’s always helpful to work with an expert to see if there are habits you can change to do better.

Experts on the benefits of credit counseling

Jared Weitz United Capital Source Inc CEO and Founder
“In most instances you are getting free advice. For many people working through credit debt or floundering in financial hardship, having someone lay out a plan forward will help you reduce your stress and be able to better manage your finances moving forward. They can give you key tools and educate you on how to get out of debt and stay there.”

Simon Nowak, 3 Credit Scores CEO
“The biggest benefit of credit counseling is learning how to budget properly. When you budget, you're aware of precisely where you're spending is excessive. Once you see where you can reduce spending you're able to allocate the savings towards eliminating debt which is the ultimate goal.”

Daniel Rodriquez, director of operations at D.R. Hill Wealth Strategies, LLC
“People will have a plan and budget in place to reduce or eliminate their debt, resulting in higher credit scores, lower interest rates, less stress and more disposable income.”

What makes a good credit counseling company?

As you’re choosing companies to work with, you need to recognize good companies to work with. One easy way to start identifying a good company is through its communication and education practices.

“The program should include (at no extra charge) educational information and material, and help and advice on creating and using a budget, and managing debt,” says Sean Fox, Freedom Debt Relief co-president.

The credit counseling company you choose should also be clear about the cost of services. Most debt relief companies offer free consultations, to make it easy to ask questions and understand fees before committing to a program.

“The agency should provide clear information, written and verbally, that explain the program, the timeframe, and the fees,” adds Fox.

Industry accreditations, memberships, and certifications

Accreditations and participation in organizations show a company’s dedication to providing high quality credit counseling. Fox identifies two to look for:

“It can be a good sign if an agency is a member of the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA, formerly the AICCCA); this indicates the company follows industry standards,” he says.

Memberships in these organizations is typically easy to determine because they are often displayed on a company’s website.

Both organizations account for accreditations from the Council on Accreditation (COA), though the AFCC also allows certification through Bureau Veritas and BSI Group. These organizations conduct in-depth reviews of companies against industry standards to determine how well they serve clients.

If you’re also considering bankruptcy or if bankruptcy comes up when you meet with a credit counselor, double-check that the agency you work with is approved to offer bankruptcy counseling.

“The Trustee Program of the U.S. Department of Justice offers a list of credit counseling agencies approved to provide counseling before a bankruptcy filing,” says Fox.

If your agency isn’t on the list and you need bankruptcy counseling, choose one that is.

In addition to looking for accreditations at the company level, you should also consider the training and certifications of a company’s credit counselors. The NFCC and FCAA also account for these when they grant membership to companies.

“When you sign up with a counselor, make sure that they are certified and educated in financial management. This might seem straight forward, however there are many instances where counselors know just as little as the customer,” recommends Weitz.

Ask questions about your counselor’s background and experience. Their response will help you determine if they are someone you want to work with.

It should also be apparent from how they talk through creating your budget, setting financial goals, and getting out of debt how knowledgeable they are.

If your credit counselor’s responses and solutions seem in-line with common practices and make sense to you, they’re probably trustworthy. If you do not know much about finance, do some research beforehand about the financial goals you want to reach so that you’ll know.

If your credit counselor makes a suggestion that seems odd, ask more questions to learn more about why that approach would make sense. If it still doesn’t make sense to you, you’re not obligated to follow the advice.

Formal and informal complaints

You’ll also want to know the history of the credit counseling agency you work with. This means checking for formal complaints and reading customer reviews.

“Check each one out with the State Attorney General and local consumer protection agency for complaints possibly filed against them,” cautions Rodriquez.

Understanding the nature of the complaints and how frequently and recently the complaints are filed will help you quickly eliminate credit counseling agencies to work with. If your options are limited, knowing what to watch out for will help you protect yourself if you do decide to work with a specific company.

Good credit counseling companies will also have good customer reviews. It’s not unusual for every company to have a few bad reviews. However, if you see an overwhelming number of bad reviews, consider working with other companies.

You can check well-known review sites, but be sure to understand how they moderate reviews. Some companies may repress reviews or may not have a good process for weeding out fake reviews. Best Company moderates all the reviews that come in to ensure that they meet verification standards and does not repress reviews.

What red flags should I watch out for with credit counseling companies?

Look out for the following red flags when investigating a credit counseling company:

• High, upfront fees
• Upfront requests for sensitive financial information, like your Social Security Number
• Charges for financial education and advice
• Unrealistic claims
• Limited debt resolution options presented
• Dropout and success rates

"The agency should provide dropout and success rates to you upon request," says Fox.

Researching companies in advance will also help you avoid scams and bad companies, but don't ignore unsettling feelings if they come up during your first meeting.

"As unscientific as it may be, you'll know if something does not feel right when checking out a company," says Fox.

Experts on red flags

Jared Weitz United Capital Source Inc CEO and Founder
“Scams and poor service exist when it comes to credit counseling. A key way to tell if you are part of a scam or working with an agency that isn’t up to par is if they ask for any large upfront set-up fees and if they make promises that sound too good to be true. There is no easy way to get out of debt and if they make it sound like you will be debt free tomorrow, tread carefully.”

Katie Ross, Education and Development Manager for American Consumer Credit Counseling
“Some red flags to watch out for to prevent credit counseling scams include high fees from the get-go, and the scammer asking you for sensitive personal financial information. If you’re unsure whether or not the agency you’re dealing with is legitimate or not, check with the Better Business Bureau,” says Ross.

Daniel Rodriquez, director of operations at D.R. Hill Wealth Strategies, LLC
“The company requests a payment before any services are provided. Consumers are told not to directly contact a credit bureau. The company tells the consumer to create a new credit report by applying for a FEIN instead of using their SSN. Consumers are not informed about actions they can do themselves for free.”

What’s the difference between credit counseling companies and credit repair companies?

Credit repair companies are very different from credit counseling companies. Credit counseling companies focus on helping people move forward and improve their finances through budgeting and making plans to get out of debt.

Credit repair companies focus on helping clients deal with bad credit by reviewing their credit report and credit history and correcting errors. Credit repair companies also offer credit monitoring and fraud notifications. They do not typically offer financial education.

“If there is a valid item being disputed, it will be removed (permanently) from the credit report. However, if it is not valid, or is resolved in favor of the creditor or lender, it will go back on the file after about 60 days. As such, some people may use a credit repair service to try and achieve only a temporary increase in a credit score in order (for instance, to improve short-run chances of getting a loan).

The danger in that outlook is that it may be taking a short-term view, not a longer-term commitment to improving credit profiles and scores. Consumers should note that credit repair services do not solve the root problem of why a consumer’s credit is poor in the first place,” says Fox.

While credit repair can help fix errors from the past, it does not help boost your credit score over time.

“Credit repair companies won’t always be able to help you, particularly if there’s nothing inaccurate on your credit reports. Credit counseling, on the other hand, can provide you with a solid educational base you can use to manage your finances more wisely in the future,” adds Messier.

What’s the best way to prepare for a credit counseling appointment?

Preparation will help you get the most out of your credit counseling. Have clear goals in mind.

For example, maybe you want help creating a budget, starting a savings account, building up an emergency fund, or getting out of debt quickly. Let the credit counselor know your financial goals and intentions. They will be able to target their advice to your goals.

You should also have hard numbers regarding your spending and your income ready. This will enable the credit counselor to work through your specific situation, and you’ll walk away with good advice and an actionable plan.

“Know your numbers. Bring paystubs. Prepare a detailed list of the money coming in and the money going out. Identify who you owe and how much you owe. Identify your financial goals and what you’re looking to accomplish by the end of everything,” advises Rodriquez.