There’s a ton of advice available for paying off debt, but there’s one problem: it’s not personalized. What might work for someone else might not work best in your case.
If you have questions about your plan and are looking for a one-on-one approach, there is a solution: credit counseling. Credit counselors will meet with you, work on a plan for your needs, and will provide assistance for free or at low cost.
Here’s a guide to using credit counseling to help pay off your debt.
How credit counselors can help
On the most basic level, credit counselors will help you manage your money and deal with debt. This includes helping you create a budget for paying off debt, both through personal sessions as well as free workshops and materials. The advice is tailored to your personal situation, which can be of more help than one-size-fits-all advice.
The National Foundation for Credit Counseling (NFCC) explains what you can expect in your session. Sessions will typically include:
- Reviewing your current financial status including debt, assets, and other liabilities
- Analyzing your income and spending
- Creating an action plan, which can include enrolling in a debt management plan
Debt management plans
One common element of a plan created with the help of credit counseling is a debt management plan. This is a plan for paying off large amounts of debt from various creditors in a simpler and potentially less-costly way.
Instead of making payments directly to creditors, consumers make one monthly payment to their debt management company which then distributes payments to creditors.
The benefits for those in debt can be significant. Credit.com reports that its debt management clients serviced by Cambridge Credit Counseling saved about $182 a month in interest on average using debt management plans. This was from a substantial decrease in interests rates of 21.62% to 7.96%, on average.
These plans often cost a monthly fee (about $30 a month is standard), and may have a few other fees attached, like an enrollment fee that shouldn’t exceed $50.
Enrollment in a debt management plan isn’t automatic. Creditors typically have to agree to accept the terms.
Still, the case study above noted that debt management plans were recommended to about one-third of credit counseling clients, and just under one-quarter (23%) actually enrolled in a debt management plans.
Decide what’s right for you
Credit counseling can be helpful for just about anyone that needs help dealing with debt. Counselors can help you get on track, but most of the work is still up to you.
Deciding on debt management plans
A bigger questions is if a debt management plan, sometimes recommended by credit counselors, makes sense. Some questions to consider are:
- Is the cost worth it? Since most have monthly fees, you may be better off applying that money towards balances rather than paying fees.
- Can you do it yourself? While debt management plans are helpful, much of the work still boils down to making payments on time. In addition, you can negotiate rates with creditors on your own.
- Are other options better? Some aren’t eligible for debt management and may need to try to settle their debts instead. Others might have to resort to bankruptcy, too.
Some consumers might do just fine without enrolling in a debt management plan. In these cases, they may be better off managing debt on their own by adjusting their budgets and coming up with a strategy to pay down debt.
Credit score impact
You may also be wondering if working with a credit counseling agency will hurt your credit score. According to The Road to Wealth, the answer is generally “no.” That’s as long as you work with a reputable agency and not one that’s a scam. Your credit score can be harmed when they promise to make on-time payments to your creditors for a debt management plan but fail to do so.
Keep in mind that many seeking credit help may already have severely damaged credit. In many cases, working with a credit counselor can be of low risk with high potential reward for credit.
Find the right counselor
Finding the right credit counseling company, including those that offer debt management plans, can take some work. Unfortunately, many scams out there charge high fees or seek to take advantage of clients in a variety of ways. This includes debt relief agencies that use ineffective or illegal tactics to “repair” your credit.
Because of this, the FTC has provided some advice for choosing the right credit counseling agency.
Always make sure to find out what the fees are up front. One way that consumers are taken advantage of is if hidden fees are charged later.
To get a better start on finding legitimate sources of help, check out NFCC resources. The NFCC has a database of approved agencies that have been checked and verified. They also have a great list of questions to ask before deciding to work with an agency.
Agencies offer free or affordable services, so you shouldn’t have to shell out a fortune to get help.