Counseling for Credit Management

An individual's inability to manage credit can negatively impact his credit score and leave him seriously insolvent, a situation where he spends more every month than he makes. Credit counseling agencies provide a number of services to a consumer (debtor) for free or a fee, including budgeting, debt management plans and settlement services which will improve a consumer's credit score and help him get his finances under control.

Budget

A credit counseling agency can help a consumer develop a budget in order to repay debt and get her monthly expenses under control. The agency will look at a consumer's income, expenses and bills and then suggest a course of action for the debtor to take. If the consumer faces bankruptcy or is seriously insolvent, the agency may recommend a debt management plan.

Plan

With a debt management plan (DMP), a credit counselor will work with the debtor's creditors to create a single affordable payment that the debtor will owe every month. This process can involve lowering interest rates and fees on credit cards and loans. The consumer will make his monthly payment to the credit management agency who will then pay creditors on behalf of the consumer. The credit counselor should provide the debtor with a clear time frame for the repayment of all debts, according to the Federal Trade Commission.

Settlement

Some debt counseling companies will negotiate with creditors for a reduced settlement, where the debtor will pay a fraction of the debt owed on unsecured debt, such as credit cards or personal loans, at 30 to 70 percent of the amount owed. Debtors can negotiate settlement offers with creditors on their own, but creditors are more likely to agree to lower owed debt in conjunction with a DMP managed by a debt counseling agency.

Selection

According to the FTC, U.S. consumers should ask what kind of services the credit management agency offers and whether they offer free educational information. Debtors should also ask for counseling fees and get a specific price in writing if they are dealing with a for-profit agency. In addition, they should ask about the qualifications of the counselors within the agency and whether the agency will not only help them solve their immediate credit problems but will help them develop a plan to avoid insolvency in the future.

Warning

Consumers should avoid credit counseling agencies that do not disclose fees up front, promise to remove negative information from a credit report or are not licensed to provide financial advice in their state. A debtor should avoid any agency that does not agree to offer services because the debtor does not have sufficient funds to pay according to the FTC. Debtors should avoid credit management firms that offer their employees compensation for enrolling people in counseling services or try to upsell services for a higher fee.