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Young couple using computer for paying bills. They are having problems.When you sign up for credit counseling from a nonprofit agency the money you owe to credit card companies, auto lenders and your doctor won’t magically disappear. The odds are high that you won’t even qualify for a debt management plan in which your bills are consolidated into one lower monthly payment.

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.

Mostly Counseling

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.”

A Partnership

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.

No forgiveness

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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This Post Has 12 Comments

  1. I need to found me a 3 bedroom and 2 bathroom house in the country in Scottsburg In. I have 0 dollars down payment and looking to move in it by next month. I’m on Disabled I make 1,418 a month

    1. Hi Richard:

      Our friends at Rocket Homes can help you search property listings and find a real estate agent in your area. Given that you’re looking in a rural area, a USDA loan might be a good option, but you can go over all of your possible loan options online using Rocket Mortgage. If you would rather get started over the phone, you can speak with one of our Home Loan Experts at (888) 980-6716. Have a great day!

    1. Hi Vanessa:

      While we don’t offer credit counseling, we can offer you some tips. If you visit our friends at QLCredit, you can get your free VantageScore 3.0 credit report and score from TransUnion. You’ll get personalized tips based on the information that’s in your report as to how to improve your score. We also have this great blog post that offers some general tips on how to get started.

  2. Hi Kevin was reading ur article and thought ide ask.
    We are in a lease contract for a home. We put down $12,000. Been here for 4 years. At the time we were going to buy, the inspection failed due to floading in garage (sewer damage ) and electrical. We do pay for everything including taxes but were totally unaware of these damages when we moved in. The owner feels its our responsibility to repair, because we pay for everything, including taxes., now our credit is bad due to a long lay off so cant buy at this time.but Even though the landlords been great he wants us to buy now , 1 we cant buy due to credit, 2- landlord cant sell till repairs are done. Our credit is bad. Ive looked into lexington law but they want way to much a month. Also Ive read about FHA bad credit loans but thats been no help. . Its hardkeeping up with rent and taxes but dont want to loose our deposit. What would u suggest
    Thanks

    1. I have a couple thoughts. If he’s serious about making the repairs, maybe you can wait until he makes them in order to give yourself some time. Secondly, you’re going to need to improve your credit. I’m going to recommend you take a look at our friends at QLCredit. You can get a free copy of your credit report without affecting your score and get personalized tips on how you can improve.

      Thanks,
      Kevin Graham

  3. Hi Kevin. This is a great articl. I went with a co. That negotiated lower balances with my creditors thus my credit is ruined for the time being. I m still over stretched and will need a car and can’t keep up w taxes. I don’t know where to turn and feel like I m drowning. I work full time as a teacher and have 3 grown children , weddings in the future and would like to retire and divorced.
    Can you recommend non for profit agencies in Westchester NY area? Thanks.
    Jane

    1. Hi Jane:

      I can’t really recommend any as I have no familiarity. However, you can do a Google search and check out reviews to look for agencies in your area that have worked for others. I’m not sure I would worry about helping out with the weddings. You need to make sure you’re on solid footing so you can have the option of helping your children in the future.

      Kevin Graham

  4. I’m so upset no one will help me at all! How am I supposed to be able to move forward if I can’t get help,,,,

    1. Hi Dyane:

      I can certainly have someone reach out and see if we can offer any advice to you about getting your credit in shape so you can move forward. In the meantime, this post ought to get you started with some tips on how to better your score.

      Thanks,
      Kevin Graham

  5. I need help with my credit report. I have no credit card debt. The bulk of the debt listed are student loans which have been forgiven due to my disability. I briefly looked at my transunion report to find errors with how debt was reported. The last reports I saw showed trans at 525 experian 690 and the other at 890. I need assistance disputing errors and reducing the multiple hard hits.

    1. Hi Philip:

      It does seem odd that your three credit scores are so far apart. I’m not sure we can personally help you all that much, but what I would do is gather all your paperwork that shows the debt that has been forgiven and then go on and file disputes for the errors online. I’m putting the links to the dispute pages here for you: TransUnion, Experian and Equifax. Good luck!

      Thanks,
      Kevin Graham

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