What is credit counseling and how does it work? (BONUS: Download-able worksheet.)

( BONUSDownload the ReadyForZero Credit Counseling Worksheet with questions to ask before signing up with a credit counselor. Print it and write on it! )

If you have had trouble paying down a credit card, chances are your bank or credit card company may have suggested you talk to a credit counselor.  They may have even given you a specific person’s name at a local credit counseling organization near your home. While contacting these counselors seems like a good idea, how do you know they will actually help? Depending on your situation it may or may not make sense to rely on a credit counseling organization, we have found that when armed with the right information and tools, people can do a lot themselves.

After spending countless hours learning about the debt relief industry, we realized most people don’t know what credit counseling is and have a tough time deciding what to do when the conversation comes up. So, we thought we would put together a short, honest post to discuss the most important details.

Part 1: You Are Making Your Credit Card Company Nervous

Why did your credit card company recommend a credit counselor and what do those people do? The simple answer is, for one reason or another, your credit card company thinks you may be at risk of getting in a situation where you won’t be able to pay them the money they loaned you. A credit counselor helps people who are starting to have difficulty paying their credit card bills. It is not a solution for everyone. People who are more than a month or two behind on their payments will not be good candidates for example.Is the credit card company genuinely looking out for you? Yes and no. To a certain extent, the credit card company genuinely wants to help you, but only if it means it will help them too (obviously!). This means they will do whatever they can to get payments from you. You can think of the relationship between credit counseling and credit card companies as a structured way for credit card companies and banks to get as much money as possible from you. Because the credit card company doesn’t know all the details about your financial situation, they rely on the credit counselors to assess how bad your situation is and what realistic options are available to you.You must fit the profile to qualify for assistance from a credit counselor. This usually means that you have stable income, a good credit history and are able to make at least the minimum payments.

Part 2: What A Credit Counselor Can Do For You

The first thing a credible credit counseling company does is help you with a budget to figure out where you stand financially. This qualification process is required to qualify you for a debt management program. Qualifying for a debt management program means you can afford a fixed monthly payment until you pay off all your debt.

What a good, credible credit counselor can do for you:
1. Provide you with financial education, budgeting tools and other useful resources;
2. Qualify you for a debt management program which will lower most of your credit cards’ interest rates;
3. Enroll you in a debt management program and support you until the end (even beyond).

By enrolling in a debt management program your interest rates are lowered to a fixed, pre-determined rate (this is not negotiated, it is already established and changes over time depending on the credit card issuer), all your open credit card accounts are closed, your credit report indicates that you are under debt management, and you are responsible for continuing the program.

Part 3: How Credit Counselors Make Money

There are two types of credit counseling organizations: for-profit (tax paying) and non-profit (tax-exempt 501c).

For-profit credit counseling organizations primarily make money by charging you a monthly fee after qualifying and enrolling you in a debt management program. Some also make money by referring you to other vendors like bankruptcy attorneys or debt settlement companies (there are also a few full-service companies that provide these other services in-house). Some for-profits will charge you other fees (in addition to the monthly charges) for setting everything up.

Non-profit (tax-exempt 501c) credit counselors primarily make money from what is called “fair share” after you are under debt management, in addition to monthly fees assessed in a similar way to the for-profit companies. “Fair share” is a pre-determined payment from your credit card company to the credit counseling organization managing your account. For-profit credit counselors are not eligible for this type of fee arrangement.

So those are the basics. We hope this will help arm you when or if you are considering a credit counselor. As always, feel free to contact us directly anytime to discuss further: support@readyforzero.com

As a bonus, we’ve put together a short list of questions that will help you determine whether or not a credit counselor is working in your best interest.

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  • Onerealkewlguy

    My understanding is that mint is about “achieving ones savings goals”, and, readyforzero is about “eliminating debt” the distinction is not lost on someone, such as myself, that is under heavy cc debt with no hope of creating savings.

  • My understanding is that mint is about “achieving ones savings goals”, and, readyforzero is about “eliminating debt” the distinction is not lost on someone, such as myself, that is under heavy cc debt with no hope of creating savings.