Credit counseling agencies have a background and education in tackling financial management problems, but they are not magic. Some people are in too deep for them to help. Other people can be helped, but turning their finances around will require some painful choices and austere living conditions. There are several potential drawbacks to consumer credit counseling, but a good agency can help you make tough calls to get you back on your financial feet.
Some Agencies Are Better Than Others
Some agencies will charge you fees the minute you walk in the door, push you into a debt payment plan through which they consolidate your debts, and then forget to pay the bills. Those are the credit counseling agencies you want to avoid. Other agencies are nonprofit. They give you the first counseling session free. Their counselors have to go through a certification program and aren't sales people. They will look at your entire financial picture and either help you devise a budget, suggest a debt management plan or suggest bankruptcy or debt settlement. To find those agencies, look to the Association of Independent Consumer Credit Counseling Agencies or the National Federation for Credit Counseling.
It Won't Always Be Pleasant
According to the AICCCA, a credit counselor must not only ask about your income, living expenses and debt, but also "identify and explore the root cause" of your financial problems. That could be an uncomfortable conversation. Also, if you sign up for a debt management plan, the agency will help you construct a pretty strict budget. As part of that budget, you pay the agency a certain amount each month to pay your unsecured debts. They sometimes negotiate down fees and interest. For this the agency charges about $50 under AICCCA and NFCC guidelines.
It Doesn't Always Work
According to the NFCC's numbers, a third of consumers can handle their debt after one session; a third are in too deep because of gambling addictions or other problems and have to be referred to social services; and another third enroll in debt management plans, but 45 percent of those drop out.
It Can Hurt Your Credit Score
Any time you negotiate a debt or fees and interest down, it can hurt your credit because it signals to other creditors that you might not pay a debt as originally agreed. So while getting out of debt by paying your bills will ultimately help your credit more than bankruptcy or debt settlement, the tactics to help you that credit agencies use could hurt you in the short run.
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