Debt load consists of credit card accounts, loans and other bills. Your debt might become overwhelming if you run up big balances or suffer an unexpected problem like unemployment or illness. Credit counseling offers a way to review your options and create a plan. The Federal Trade Commission explains that a good counselor shows you every alternative, from budgeting on your own to letting the counseling agency administer a debt management plan.
Definition
Credit counseling is a service provided by professional organizations. The FTC explains that many counseling firms are nonprofit, although they do charge fees for certain services. Counselors discuss your financial situation with you in person, in a phone call, through email or online chat. Together you determine your best course of action, whether it is development of a personal budget, a formal repayment plan or bankruptcy. For example, if the counselor discovers that you have sufficient income but are spending too much unnecessarily, you might be taught to make and follow a strict budget. Many counseling organizations also offer free information online for self-study. If you have trouble disciplining yourself to pay bills, you might need a formally administered plan. Bankruptcy might be the recommendation if your obligations far outweigh your income.
Location
The FTC advises that you can find credit counselors through banks, credit unions, universities, housing authorities and military bases. Consumer protection agencies sometimes offer referrals. Professional credit counseling organizations like the Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling maintain databases that list firms in certain areas. Limit your search to nonprofit firms.
Choosing a Firm
The FTC website advises caution when choosing a credit counselor because some firms charge excessive fees or push you into debt management plans that might not be your best option. Ask any counseling firm you are considering whether it is licensed in your state and if its counselors have outside training and certification. Ask about the services offered. A good firm offers everything from budgeting advice to classes to payment plans. Request a list of fees and ensure that the firm offers written contracts.
Warning
Do not confuse credit counseling firms that offer debt management plans with companies that offer debt negotiation services, the FTC website warns. A debt management plan sets up a specific repayment schedule. You give your money to the counseling firm each month, and the firm redistributes it to your creditors. The plan should be aimed at paying off your bills in a minimum of 48 months. Debt negotiation means that the firm tries to get your creditors to accept lower balances. Some companies claim they can slash your bills by up to 50 percent, but the FTC explains that those companies often exaggerate. Debt negotiation can seriously hurt your credit rating, and unscrupulous companies charge a large fee or collect monthly payments and give nothing in return.
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