- 1.Turned Down for What: Rebuilding Your Credit After Being Denied a Mortgage
- 2.Can You Get a Mortgage If Your Spouse Has Bad Credit?
- 3.Considering Credit Counseling? Here’s What to Expect
- 4.How Does Your Credit Score Affect Your Mortgage Eligibility?
- 5.9 Common Credit Card Mistakes to Avoid
The vast majority of people who sign up for credit counseling will receive advice on how to reduce their spending, pay down their debts slowly over time or change the financial habits that first got them into money trouble.
Nonprofit agencies rarely sign consumers up for more intensive debt management plans, says Kevin Weeks, president of the Washington, D.C.-based Financial Counselors of America. Most consumers who call a credit counseling service might think that they qualify for this solution, where credit counselors negotiate lower interest rates and a single monthly payment on credit card debts. But few actually do, Weeks says.
“Credit counseling is not just about paying off your debt,” Weeks states. “It’s about educating people on their finances and how to manage their debt.”
The myth that debt management plans are the only services that counselors provide is just one misconception consumers have about credit counseling, Weeks says. It just happens to be one of the most persistent.
So what does actually happen when you sign up for credit counseling? Here are five things to expect.
April Lewis-Parks, director of education with Fort Lauderdale, Florida-based Consolidated Credit Counseling, says that her agency receives about 1,000 calls daily. Of those callers, only about 10% qualify for a debt management program.
The majority of consumers who don’t qualify? The interest rates on their credit cards aren’t high enough. Credit counselors negotiate with credit card companies to lower the rates that they are charging struggling consumers. If these rates are already low, say under 15%, creditors won’t be able to lower consumers’ rates enough to make a significant enough difference on how fast their debt is growing.
Usually, consumers who qualify for debt management programs have interest rates of 24% or higher on their credit card debt, Lewis-Parks says. Counselors then negotiate these rates down, usually to somewhere around 10%.
Others don’t qualify for debt management plans because they don’t have enough income coming in to pay back their debt, Lewis-Parks states. Consumers who are out of work usually can’t participate in this plan because creditors want to make sure they will receive their agreed-upon payments each month.
Most of what credit counselors do involves finding ways consumers can reduce their monthly spending, pay down their credit card debt in more traditional ways and change their negative financial habits. They might teach others how they can improve their credit scores by eliminating late payments and paying down at least some of their outstanding credit card debt.
“Our goal is to find the best path for each specific client to take,” Lewis-Parks says. “We are an advisory service. Debt management plans are only a very small part of what we do.”
Bruce McClary, vice president of external affairs and public relations for the Washington, D.C.-based National Foundation for Credit Counseling, says that consumers shouldn’t discount the advice-giving portion of credit counseling. It’s often when talking over their finances with a counselor that consumers discover how to alleviate their money woes.
“We’ll be talking and they’ll start connecting the dots on their own on what they can do differently,” McClary says. “That’s when you know a client has a good chance of succeeding.”
McClary gives one example: When clients see how much of a dent they can make on their credit card debt by applying $200 or so extra each month, they might decide to sell a car that they still owe payments on and instead rely on a second car that they have already paid off.
Low – or no – fees
Nonprofit agencies don’t charge any fees for basic counseling services and only low monthly fees for debt management plans, according to Weeks.
That’s why consumers should only work with nonprofit credit counseling services accredited by the National Association of Certified Credit Counselors or Association of Credit Counseling Professionals. Private, for-profit credit counseling services will charge often high fees for the same services that nonprofit agencies provide free.
Weeks says that back in the early 2000s there were about 600 to 700 companies advertising credit counseling services, with many of these for-profit agencies that often overcharged consumers. Today, there are only about 150 agencies actively advertising credit counseling services, with many of the illegitimate companies now out of the business.
If an agency does want to charge you for going over your monthly budget? Weeks recommends you drop that agency and search for a nonprofit that won’t charge for providing advice.
You will, though, have to pay a monthly fee if your credit counselor creates a debt management program for you. This fee varies by state but can never go higher than $69 a month, says Lewis-Parks. Most consumers will pay $25 to $35 a month for debt management programs, a fee that will be rolled into the payments they’ll make each month to the credit counseling service. Once consumers make these payments, the counseling service will disperse the money to creditors.
About that monthly payment. Lewis-Parks states that creditors decide how much of a payment they’ll accept each month. Usually, creditors require that consumers pay from 2–2.5% of the principal balance on their cards.
If you do enroll in a debt management plan, don’t expect creditors to forgive any of your principal balance. Instead, creditors will agree to provide you with a lower interest rate on your existing credit card debt so that it doesn’t grow as quickly each month.
Lewis-Parks says that consumers then have to promise to not make any more charges on their cards and not apply for any new credit cards. If they do, they’ll break their agreement, and the interest rates on their credit card debt will zoom back up.
Counseling agencies can only set up debt management plans on unsecured debt, which is usually credit card debt or money consumers owe for medical services. Consumers can’t set up debt management plans for secured debt such as mortgage or auto loans, Lewis-Parks says.
No falling credit scores.
Many consumers worry that their credit score will fall if they enter credit counseling. But credit counselors don’t report to the three national credit bureaus of TransUnion, Experian and Equifax, so consumers’ credit scores will not take a hit even if they sign up for a debt management plan.
Lewis-Parks does warn that consumers will see their credit scores tumble if they don’t make their new monthly payment on time.
“Usually when people complain that credit counseling made their score fall, it’s because they didn’t make their new payments when they were supposed to,” Lewis-Parks says. “When that happens, it’s reported just like any other late payment.”
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