How Can Credit Counseling and Debt Relief Services Help?
Making a dent in mounting debt can feel like you’re trying to swim across a vast ocean. It can be easy to lose perspective and get lost in the depths of your financial situation. But sometimes, all it takes to make it to the other side is a life vest in the form of credit counseling and debt relief services.
Credit union credit counseling from your local credit union can help you find the right course toward reducing your debt. Meanwhile, keep your head up and keep reading to learn more about how the best credit counseling services can help you get there, one stroke at a time.
What is Credit Counseling?
Credit counseling is a service that helps people in debt take control of their finances and create a debt relief plan through avenues such as money management courses and budget planning workshops.
How can credit counseling help? The main goal of these services is to help people eliminate debt by following proven debt-reduction strategies. Those debts could include anything from home mortgages to auto loans, or credit card overages to student loans.
Credit counseling services are available through organizations like financial institutions, not-for-profit agencies, and for-profit companies. In fact, your local credit union may be able to help guide you toward the best solution, thanks to the member-friendly not-for-profit business model and low or no-fee structure of credit unions.
No matter what direction you take, it’s necessary to research credit counseling programs before joining, as some for-profit companies may have high service fees that counter your money-saving goals.
Credit counseling strategies include:
- Learning how to budget through financial education courses.
- Creating a debt management plan to consolidate debts into one low payment with a lower interest rate.
- Negotiating debt settlements to waive debts in whole or part.
The best course of action to take will depend on your unique financial situation. Your credit counselor will help guide you to a decision that suits your needs.
Services Available at a Credit Counseling Agency
No two debts are the same. That’s why credit counseling agencies offer a variety of services and resources to help clients manage their debts.
Here are some examples of how credit counseling services, like those you’d find through credit union financial counseling, can help:
- Credit counselors offer advice and education on money management and budgeting.
- Credit counseling agencies can help you obtain and understand your credit report and scores.
- Many credit counseling agencies provide free education workshops and tools to track your income and expenses.
- Credit counselors create debt management plans to help clients identify, consolidate, and pay off their debts while improving their credit scores.
These are just some ways credit counseling agencies can help you regain control of your finances. In addition, many credit counselors can also offer insight into whether you might want to declare bankruptcy, take out a loan, or enroll in a debt management plan.
What is a Debt Management Plan?
A debt management plan is a debt repayment plan set up by a credit counseling agency. How can debt relief services help? They allow clients to consolidate debt under a lower interest rate and make affordable monthly payments to pay it off.
Unlike other methods of paying debt, debt management plans don’t require taking out another loan or having a good credit score. However, many creditors instruct participants to close all of their credit cards during the program to prevent taking on additional debt.
On average, debt management plans take three to five years to complete, although the length can vary depending on your unique financial situation.
Benefits of debt management plans include:
- Debt management plans offer affordable payments based on income and expenses.
- Unlike high-interest credit cards, debt management plans typically have low-interest rates that help lower monthly payments.
- Debt management plans consolidate many debts into one simple payment, making it easier to keep track of scheduled expenses.
- After consistent payments, most people’s credit scores improve.
- Credit counseling agents offer additional financial education, empowering clients to make healthy money decisions for the future while eliminating existing debts.
For many, debt management plans are efficient and streamlined ways of paying off debts.
What to Look for in a Credit Counseling Agency
When choosing a credit counseling agency, look for an organization that offers a variety of services, meets certification criteria, and delivers personalized assistance.
Here are a few factors to consider:
- Everyone’s financial needs are different. Look for a credit counseling outlet that offers various services, including financial education, budgeting workshops, and debt management plans.
- Find an organization you can trust. Most credit counseling agencies are National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA) members. They will have certifications and accreditations to back up the quality of their services. Also, inquire about the training and background of your counselor to ensure they have experience handling your needs.
- Get upfront information about credit counseling costs. Many not-for-profit organizations offer free consultations, resources, and educational classes. However, there may be small fees for setting up debt management plans. Be cautious of for-profit debt relief companies with high costs and complicated pricing structures.
- Think about your work style preferences. For example, would you prefer to interact with an organization in-person, over the phone, or online?
Remember, while credit counselors are there to help, you will also have to put in the work to understand your finances and budget better. There may be a difference in skill level between the breaststroke and a doggy paddle, but ultimately both will get you across the water. So pick an organization you can picture yourself working with on your terms and at your pace.
Benefits and Risks of Debt Settlement
While debt management plans work to consolidate debt into easy payments, debt settlements seek to lower your debt through the power of negotiation. Rather than creating a plan to pay off your entire debt, your agent works to strike a deal with a creditor to reduce the balance to a percentage of what you owe.
While debt settlement can be a valid option, it has its share of benefits and risks.
Benefits of debt settlement
The benefits include:
- The ability to lower or eliminate your debt and additional fees.
- Assistance with avoiding large interest payments.
- Preventing a bankruptcy filing.
Risks of debt settlement
The risks may include:
- Debt settlement or debt relief companies may be unable to reach an agreement with creditors, leaving you with your original debt and added expenses.
- The forgiven debt may be counted as taxable income, resulting in higher federal income tax payments for the year.
- Debt relief companies may charge high fees that you will be responsible for on top of your remaining debts.
- Debt settlements may hurt your credit score.
- Once negotiated, debt settlements typically require you to make one lump-sum payment to cover your newly reduced balance. However, you may need more cash than you have on hand to cover the negotiated amount.
Further Resources on Credit Counseling and Debt Relief Services
Here are some additional resources to get you through the journey to becoming debt free:
- Know your rights. Discover resources and education on essential money topics through The Consumer Finance Protection Bureau.
- Ensure your counselor is qualified. Learn more about what goes into credit counselor certification through the National Foundation for Credit Counseling.
- Experiment with your options. Use the debt consolidation calculator on Calculator.net to see how consolidating debts under a new interest rate can help lower monthly payments.
Navigate Rough Financial Currents with a Credit Union
While financial difficulties can have you feeling like you’re being pulled under, your local credit union can help you stay afloat. Use our Credit Union Locator tool to discover credit union credit counseling services near you. From budgeting workshops to one-on-one support, you’ll find the right tools and guidance to help you reach the sunny shores of financial freedom.