A credit counselor is a person who helps work with your creditors to lower your interest rates.  Credit card companies will work with these agencies because it’s better for them to work this way and get paid smaller amounts of money than to have you stop paying your bill and get no money at all.  A credit counselor will work with you to figure out a plan to pay off your debt that’s tailored to your specific needs.  You will pay one monthly bill to the credit counseling agency and they will pay your debt for you.  Besides offering you a way out of debt, a credit counselor can also act as a sympathetic knowledgeable ear to ask your questions and express your concern.

You should not think of credit counselors as a cure-all for your money troubles.  You still have to pay off your debt; they simply make it more manageable.  Plus, going to a credit counselor goes on your credit report and still significantly affects your credit report.  The affect of credit counseling is about the same as declaring Chapter 13 bankruptcy (redistribution of debt), but not nearly as bad as declaring chapter 7 bankruptcy (total liquidation of assets).   It does keep you out of court though.  Another downside of credit counseling is that you generally have to give up all your credit cards so you can concentrate solely on paying off debt.

When you decide that credit counseling is the route you want to take, you should be sure to find a reputable agency that is going to work in your best interest.  Sadly, there are lots of companies out there that are perfectly willing to take advantage of your situation if you’ll let them.  You first step is to find an agency that is not-for profit.  Most large agencies are; however, some are non-profit branches of a for-profit company.  It’s best to research the company you’re going to work with first to make sure this isn’t the case.  Plus, even if a company is a legitimate not-for profit, that doesn’t mean they have your best interest in mind.  If a company offers a quick fix if you pay an upfront fee or guarantees you help before knowing your financial situation, keep looking.  Legitimate credit counselors offer their services at very low rates, many times less than 20 dollars a month, and they will never ask for money before services are rendered.  If you’re having trouble finding a credit counseling agency you think is legit or just want help finding one, you can always check with the Better Business Bureau.  They can give you a list of reputable credit counselors that you can work with.

What you need to remember is that while there’s no quick fix to being in debt, there are people out there who are willing and able to help you; you just have to ask.

When people go into deep debt, they often think that the only solution to the problem is to simply get a bankruptcy and start over again. Bankruptcies, though, aren’t exactly “starting” over—they stay on your credit record for years and also make you look bad to potential lenders. So what are you supposed to do if you’ve got deep debt? You could take the bankruptcy route and damage your credit more or you could do something else that will allow you to get out of debt while not further harming your credit: credit counseling.

What is Credit Counseling?

Credit counseling is essentially debt counseling. When you get into a lot of debt and are unable to pay it off on your own, you’ll go to a credit counselor who will tell you the best method of paying off the debt. Credit counseling gives you an effective way of paying off whatever credit card debt you may have.

When should I consider Credit Counseling?

Anyone who has debt which they cannot pay off should consider credit counseling. Credit counseling offers you a way out of the mess of credit card debt. Qualified and experienced credit counselors can look at your debt and determine the best way of paying it off. Depending on how much debt you have, your counselor may tell you about a debt reduction plan to help rid yourself of the debt.

What is a Debt Reduction Plan?

Under a debt reduction plan, your counselor will consolidate all your debts into one monthly payment which you give to the counselor who then disperses it to creditors. Your counselor will also attempt to lower your interest rates and will arrange payments to each creditor in a way that enables you to pay off the debt as quickly as possible. Most debt reduction plans last anywhere from 12-60 months, although people with a huge amount of debt ($30,000 or greater) may end up in a debt reduction plan of longer than 5 months. How long your debt reduction plan lasts will entirely depend on how much you can afford to set aside for your bills each month and how much debt you have.

Why is Credit Counseling Effective?

Credit counseling is effective because those who work as credit counselors are able to financially analyze any situation and tell the person who is in debt what the best option is for them in regards to paying off the debt. They are able to create individualized plans for anyone who is debt.

Why is Credit Counseling NOT Effective?

Generally speaking, most credit counseling is effective. However, if you go to a credit counseling agency that is unaccredited and dishonest, you will run into big problems. In fact, you may even be worse off than before. That’s why picking the right credit counseling agency is extremely important.

How do I pick the right Credit Counselor?

The first step toward selecting a credit counselor is to open your phone book. Look for the section of the yellow pages about “Credit counseling”.

Take a look at each listing—there should be at least one local credit counseling agency in your area. As you look at each listing, make note of the name of the counseling agency.

After you’ve come up with a list of agencies, log on to Google.com and google each agency. Really research each agency so that you do not end up with one that isn’t effective. You may want to check out http://www.nfcc.org/ for a list of accredited credit counseling agencies. Those agencies that are accredited are usually the most effective ones.

Questions to Ask a Credit Counselor

Once you narrow the list down to potential suitors, you’ll still have some work to do before you can pick a good credit counselor. Each agency that you may consider should offer a free session. Take advantage of this session to ask the counselor some of the following questions:

• What fees are associated with using this counseling agency to get out of debt? While virtually every counseling agency is non-profit, they will still all charge some fees to help cover administrative costs. Generally speaking, you will not want to choose an agency that charges more than $50 a month for their services.
• How will you tackle my debt?
• Will you employ a debt reduction plan?
• Will I have to pay any extra fees?
• It’s important to know how a perspective counselor will help you to get rid of your debt before you even sign up with them.
• How long will the plan take? In other words, how long will it take for me to pay off all this debt? Time is money, and if you’re looking to pay off your debt in a specific amount of time, perhaps a year or two, it’s important to ask how long it will take you to pay off the debt using this credit counseling agency.
• Are you accredited? It’s a legitimate question that you should ask every single perspective credit counselor. Good, accredited counselors will not mind this question. Those who aren’t will mind the question, and that’s a good indication that they are not right for you.
• Will you tailor your plan to fit my unique needs? Everyone’s situation is different and good credit counselors will take all of your needs into consideration when coming up with a plan. Make sure that the credit counselor that you are considering will be able to tailor fit a plan to you.
• Can I meet with you once a year to discuss my debt and how much I’ve paid off?

It’s important to stay updated when it comes to using credit counseling. Most credit counseling agencies will encourage meeting up with their clients once or twice a year to discuss details of the plan and how well it is working. They will also review your credit report with you.

Recommended Credit Counseling Agencies

It is often very difficult for some people to find credit counseling agencies that are respectable and legitimate. While the agencies below may not have offices in your city, some offer online services that you may be able to use.

• GreenPath – GreenPath has offices in many states and cities. They’ve helped millions of people get out of debt and are accredited.

• Delray CC – Delray offers completely free credit counseling services to millions of people. They are accredited and can counsel via the internet or the phone.

• MoneyManagement – MoneyManagement offers services both online and in person at their many locations. There are some fees associated with MoneyManagement, but they are minimal. MoneManagement is fully accredited and very effective.

Keep in mind that these are just three of the many possible credit counseling agencies that you can use to get out of debt. Check the NFCC for more possible options.

Credit Counseling

If you are not disciplined enough to create a workable budget and stick to it, cannot work out a repayment plan with your creditors, or cannot keep track of mounting bills, consider contacting a credit counseling organization. Many credit-counseling organizations are nonprofit and work with you to solve your financial problems.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Regardless of your particular need, selecting the right credit counselor is vital. Unfortunately, some organizations, including some that label themselves “nonprofit credit counseling agencies,” can be underhanded and more concerned with helping their own bank accounts than helping yours. An April 2005 report by a U.S. Senate investigating committee reported, “Some new entrants to the industry, however, have developed a completely different business model – a ‘for-profit model’ designed so that their non-profit credit counseling agencies generate massive revenues for for-profit affiliates.

Consumers need to know and understand the differences when selecting a credit counselor. They must know the warning signs. The following information can serve as a valuable guide to help consumers “know the difference” when choosing a credit counseling agency.

1. Ask the BBB (Better Business Bureau) and other third parties about the agency. A number of independent or government organizations work to protect consumers by collecting complaints and making the information public. The BBB is one such agency.

2. Be skeptical of extravagant promises. Some organizations claim they can “fix” a bad credit report or credit score. Others say they can settle a consumer’s debts for relatively little money. If an agency sounds too good to be true, it probably is. Reliable credit counselors help people manage their money better and, if appropriate, can set up a realistic repayment plan that is acceptable to creditors.

3. Make sure counseling sessions are substantial. The length of a counseling session will vary from agency to agency, but consumers need to make sure the counselor takes enough time to understand your personal situation

4. How does the agency protect consumers’ money? Consumers need confidence that any funds they hand over to an agency for debt repayments are secure. Consumers need to ask for evidence that an agency is bonded or has insurance that protects their money from fraud or the agency’s own financial difficulties.

Debt Management Plans

If your financial problems stem from too much debt or your inability to repay your debts, a credit-counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone.

You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.

In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you.

A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take you to complete the plan. You may have to agree not to apply for — or use — any additional credit while you are participating in the plan. As above, here are also things to look for when looking for a Debt Management Plan.

1. ALL payments sent to the agency should go to creditors and be disbursed in a timely manner. Some agencies may take the entire first month’s payment and call it a “fee” or “donation.” Consumers should ask whether this is the agency’s policy. It is also a good idea to ask whether the agency holds payments or disburses them shortly after receipt. The success of a DMP relies upon full and timely payment to creditors to reduce a client’s debt.

2. Does the agency provide a full range of services, or is it just trying to push a profitable Debt Management Plan? Consumers should seek out an agency that provides a full range of services and tailors plans to each consumer’s personal circumstances.

3. The full amount of Debt Management Plan repayments should go to creditors. Some agencies may take a portion of a consumer’s debt repayment and call it a fee or “donation;” others may even take the entire first month’s payment. Consumers should find out how much of each monthly payment is going to creditors and how much is going to the credit-counseling agency. The full amount of those payments should be paid to creditors to reduce the client’s debt.

4. Make sure the agency will work with all of your creditors. Before entering a DMP, consumers should make sure the agency would work with all of their creditors. Some agencies may refuse to work with creditors unless the creditor agrees to a certain level of financial support for the agency. No agency can require creditors to recognize a DMP program, but the agency should be willing to reach out to every creditor.

If debt has consumed you, and your life is getting more difficult by the day, then Debt management and credit counseling are probably two very important choices to consider. If you have severe debt, you may be eligible to enroll in a Debt Management Plan. It takes approximately 36-60 months to repay debts through a DMP. This is sometimes the best alternative to debt freedom.