July 2, 2022
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Credit counseling 101 | NextAdvising with TIME

By on March 9, 2021 0
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Personalized and free financial advice – without obligations and “without pitfalls”, according to an expert.

It is not too good to be true. In light of the COVID-19 pandemic, personal finance professionals say credit counseling services can be a risk-free lifeline for all types of people. And many organizations that offer it are stepping up their outreach efforts.

“There is no pitfall in receiving the financial advice provided during credit counseling,” said Jim Triggs, CEO of Money Management International, a non-profit financial advisory firm. Use of this voluntary counseling service is between you and the credit counseling company, Triggs says, and will not result in the transmission of information to credit bureaus without your consent.

Credit counseling is free or inexpensive, and it’s usually offered by nonprofits. Consolidated Credit, for example, recently announced the launch of its Shutdown Hotline, a free phone service that offers debt analysis and reference to resources specific to COVID-19. And the National Foundation for Credit Counseling (NFCC) also offers free credit counseling services dedicated to helping people in light of the pandemic. The group is working to help people get “a little bit of a break” for short-term relief, spokesperson Bruce McClary recently told CNBC Select.

If you are interested in credit counseling, we will explain how to choose a qualified credit counseling agency and what to expect from the process. We will also provide valuable advice from industry experts on how to get the most out of credit counseling services.

What is credit counseling?

First and foremost, credit counseling takes an educational approach to debt management. This is in stark contrast to services such as debt settlement, where for-profit companies try to settle debts on your behalf in exchange for high fees. The ultimate goal is to empower people to take control of their own financial health and, more importantly, to make better decisions in the future.

“We lack the knowledge and education we all need to manage our finances and feel good about doing it,” says Anthony Carlton, independent financial advisor at LearnLux, a company that creates online tools and information about financial literacy. “Money is the number one source of stress for Americans, and there has to be a major change in the way we teach people about practical money management.” For Carlton, the solution is clear: greater access to financial advice.

A common misconception is that you have to be in debt to get credit counseling. It couldn’t be further from the truth. “Everyone has the opportunity to benefit from a credit counseling session with a certified credit counselor,” says Chase Peckham, director of community outreach at the San Diego Financial Literacy Center and host of the personal finance podcast “Talk Wealth To Me ”. “A certified credit counselor will go over your budget with you to find areas where your spending could be higher than what you had achieved, discuss some savings tips, as well as suggestions on how to pay off debt,” if applicable.

Whether you need a debt management plan or just want some advice on how to better manage your finances, there is always something to be gained from credit counseling. But those with large, high-interest debt or who are several months behind on payments stand to gain the most from this service.

According to the Federal Reserve Bank of New York, 4.7% of all consumer debt balances were at least 30 days overdue at the end of 2019; of these balances, almost two-thirds were more than 90 days late. The study found that almost 9% of credit card debt balances were overdue for at least 90 days.

So it’s no surprise that the majority of people who seek credit counseling are struggling with credit card debt, according to Peckham. For those with large credit card debt, credit counselors can offer a range of solutions from expert advice to debt management plans.

How to choose a credit counselor

When it comes to choosing a credit counseling agency, accreditation is key. For Anthony Carlton, two names come to mind: the National Foundation for Credit Counseling and the Financial Counseling Association of America. “These two nonprofits are also the two largest independent credit counseling certifiers, so look for the initials NFCC and FCAA when looking for a reputable credit counselor,” Carlton advises.

It’s also important to note that some credit counseling agencies specialize in specific types of debt. “For example, at DebtWave, we specialize in helping consumers pay off their credit card debt,” says Chase Peckham. “For consumers who also have student loan debt or car payments that they are struggling with, our team can provide resources and advice, but we cannot help them beyond pointing them in the right direction. direction. With that in mind, look at the types of debt you struggle with the most and try to find a credit counseling agency with specific expertise in those areas.

Pro tip

The relationship is a two-way street. You’ll only get what you put into credit counseling, and that means being upfront and honest with your advisor.

Credit counseling solutions

While credit counseling is a logical first step for many debt repayment options, there are alternatives that can be pursued alongside financial counseling. One option is debt settlement, a service offered by companies (usually for-profit) in which they attempt to settle your debts for a lower amount in exchange for fees. However, nothing is guaranteed by the debt settlement process, which often takes years and can have serious consequences on your finances and credit.

Another option is debt consolidation loans. This might be a good solution if you have multiple high interest loans with large monthly interest payments that are preventing you from making progress in paying off the principal. These loans consist of taking out a single low interest loan to repay and close your existing high rate loans. As with any type of loan, those with better credit scores will get better interest rates; those with lower credit scores may be required to secure the loan with collateral, which creates additional risk.

Finally, filing for bankruptcy is sometimes the best outcome for some people with particularly high debt-to-income ratios. Keep in mind that credit counseling is a prerequisite for filing for bankruptcy. The US Department of Justice maintains a list of nonprofit credit counseling agencies that are approved for pre-bankruptcy counseling.

If you choose to set up a debt management plan with a credit counseling agency, make sure it’s not the only thing you take away from the relationship. A good credit counseling service will provide you with ongoing support and training throughout your DMP to help you learn how to manage your finances better in the future. If the agency can’t commit to this level of support, it’s time to seek out other credit counselors.

“Credit counseling can provide clarity and direction when you are having financial difficulties, but we are limited when our clients do not disclose important details or when they wait too long to contact us,” says Jim Triggs. “It takes a willingness to become more organized and to work hard to achieve your goal. “