( BONUS: Download 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
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
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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: firstname.lastname@example.org
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.