You’re drowning in debt, living paycheck to paycheck, have very little saved and can’t find the relief you need. Before you throw in the towel or file bankruptcy, consider non-profit credit counseling. Some agencies offer services free of charge to help you get back on track financially and alleviate the stress from your overwhelming debt load.
What Is a Credit Counseling Plan?
Credit counseling plans are designed to help you resolve outstanding unsecured debt, like credit card debt, outstanding medical bills, payday loans and student loans, faster and improve your financial situation. They’re often referred to as debt management programs or debt management plans (DMPs), which are modified repayment plans that typically span three to five years. Here’s how they work:
- Step 1: The credit counselor reviews your finances to determine if you’re a good fit for a DMP. If so, they work with you to decide on an amount you can afford to pay towards your unsecured debts that will be enrolled in the plan.
- Step 2: The credit counselor connects with your lenders and creditors to propose the modified repayment plan and negotiate concessions, like fee waivers and reduced interest rates, on your behalf.
- Step 3: You make the agreed-upon monthly payment to the credit counseling agencies. The funds are dispersed to your creditors per the repayment plan until your outstanding balances are paid in full.
While credit counseling plans can help you get out of debt faster, there are a few drawbacks to be mindful of. For starters, creditors and lenders aren’t obligated to participate in the plan. And even if they do agree, but you experience financial difficulties and fall behind on the payments, you could be removed from the DMP. Furthermore, you’ll likely have to agree to refrain from using the credit cards you have included in the program. You may leave some cards out for emergencies to secure a hotel room or rent a car. You may also still qualify to purchase a house or new car while in the program.
For-Profit Credit Counseling vs. Non-Profit Credit Counseling Agencies
Not all credit counseling agencies are the same. Here are some key differences between both for-profit and non-profit entities to be mindful of when researching your options:
- Consultation: Non-profit agencies typically conduct a holistic review of your financials and create a personalized plan that will help you manage your money and outstanding debt obligations more effectively. But when you reach out to a for-profit credit counseling company, the consultation will likely focus solely on your debt load and push relief options, like debt settlement, that could be harmful to your finances.
- Solutions: DMPs are the preferred choice of non-profit credit counseling agencies, but for-profit entities lean towards debt settlement.
- Guidance: You’re more likely to receive detailed advice on the lasting impacts of the debt relief option you choose, including credit and tax implications, from a non-profit credit counselor than a for-profit credit counselor.
- Fees: DMPs offered by non-profits typically come with a fee that’s worked into the long-term monthly payment plan, but other educational resources are free. But with debt settlement through a for-profit company, you’ll pay a set percentage each time a debt is settled.
Benefits of Credit Counseling
If you choose to move forward with credit counseling from a non-profit entity, there are several perks you’ll receive to make your life easier.
- You’ll work directly with a seasoned credit counselor to develop a more effective budgeting strategy that helps keep spending in check so you can meet your financial goal.
- If a DMP is a good fit, you could streamline the repayment process and pay off your outstanding balances in a fraction of the time it would take if you only made the minimum monthly payments.
- Your credit counselor will work directly with creditors to negotiate concessions that help you save on monthly payments, interest and fees.
- The collection calls and other activities will halt once you’re enrolled in a DMP and begin making payments.
- The impact on your credit score from a DMP is far less significant than debt settlement since all your creditors will be paid what they’re owed.
How to Select a Non-Profit Credit Counseling Agency
Before selecting a non-profit credit counseling agency to work with, here are some factors to consider:
Fees and Costs
How much does the agency charge for its services? It generally varies by the services you receive and your location. Evaluate a few options to confirm you’re getting the best deal.
Types of Debt They Can Help You With
Are you seeking assistance with unsecured or secured debt? The scope of non-profit credit counseling agencies is limited to certain types of unsecured debt. Confirm that they can assist you before enrolling.
Credit Relief Process
Is the process seamless for the consumer or complex? Inquire about what to expect and go with the most user-friendly agency.
Impact On Your Credit Score
Does the agency offer resources on how their services could potentially impact your credit score? Are the counselors well-versed enough in this area to communicate this information to you in a way that’s easy to understand?
Agency Accreditations
Is the agency licensed to do business in your state? Are they accredited?
Look At Their Track Record
What do past and current clients have to say? Are most reviews positive, or is there a cause for concern?
Other Services Offered
Beyond basic money management advice and DMPs, are there other services available? How about bankruptcy, housing or student loan counseling?
