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What Is Credit Counseling and How Can It Help?

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When debt becomes financially overwhelming, you may feel that bankruptcy is the only solution. However, despite its drastic nature and long-term impact on your credit scores, bankruptcy doesn't cancel all of your debts. Most student loans, for example, are not impacted by a bankruptcy. Plus, for some people, it's psychologically important to pay back what they owe.

If you need help digging your way out of debt, a credit counselor may be able to assist. However, it's important that you find a reputable professional who actually can help you, not a scammer who will sell you debt “management” products that could be harmful to your credit.

What is credit counseling?

Credit counseling is a process in which you, with the help of your credit counselor, set up a budget, learn money management skills and create a plan for eliminating your debts.

During one-on-one session(s), you'll give the counselor information about your debts, income, expenses and other aspects of your financial situation. The counselor then uses this information to help you figure out your best course of action.

Many nonprofit agencies offer this type of consultation for free; however, a few may charge a small fee (normally not more than $100). The National Foundation for Credit Counseling (NFCC) is the largest nonprofit organization for credit counseling and can be a great place to start if you need help tackling your debt.

Will counseling impact my credit history or credit scores?

No. Simply speaking to a credit counselor won't affect your credit history or credit scores. However, if your counselor sets you up with a debt management program, or DMP, then it's possible that your credit standing may be affected in some way. DMPs are agreements whereby you allow your counselor to make debt payments on your behalf. For example, if you are paying off debt to multiple lenders, you simply pay a lump sum to your credit counselor, who then decides how that money is allocated toward your various debts. It's important to note that participating in a DMP may appear on your credit history, which could lower your credit scores until you've paid off your debt.

Be wary of credit counselors who try to push you into a DMP as your only option before they have information about your specific situation. While DMPs may be helpful for some consumers, they aren't right for everyone and you shouldn't feel pressured by your counselor to sign up for one if you don't feel it's right for you.

How do I find a credit counselor?

The best place to start your search is the NFCC (National Foundation for Credit Counseling.) This organization has been around for more than 60 years and is the country's largest accreditor of credit counselors. On their website, you'll find a directory of nearby counselors, and you can choose one who specializes in the area where you're having the most trouble (for example, credit cards, mortgage payments or other types of debt).

Watch out for scams

When the bills are piling up and debt collectors start calling, often the only thing you're focused on is getting relief. Scammers know this and prey on desperate people to make a quick buck.

There are a lot of companies that promise quick, easy solutions to get you out of debt, but they actually repay your creditors less than what you actually owe. Be wary of anyone who promises to get you off the hook without paying the total balance on your debts or who requires you to pay for their services up front. Also, just because a credit counseling agency claims it's a “nonprofit” doesn't mean its services are free or low-cost.

Do not enter into any agreement or program if you're not sure you understand all of the rules, risks and fees that come along with it. Debt consolidation companies are required by law to give you information about their pricing, terms and expected results, as well as the repercussions of not paying your debts.

There are a number of red flags to watch for, so be wary if a company:

  • Asks for money even before offering you any services.
  • Makes promises that sound too good to be true, such as fixing credit report inaccuracies or erasing debt overnight.
  • Claims it can change correct information on your credit report.
  • Asks you to pay large monthly service fees or to hand over a substantial chunk of the money they claim you'll save with them.
  • Wants you to pay them instead of your creditors.
  • Asks you to apply for an Employer Identification Number (EIN) instead of using your Social Security Number.

Again, be on the lookout for credit counselors who push a debt management program as your only possible option.

If you think a credit counseling agency may not be completely above board, you can report them to the Federal Trade Commission or your state's attorney general.

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