According to ValuePenguin, the mean credit card debt of U.S. households is approximately $5,700. If this sounds like your financial situation, you may be considering credit counseling. Credit counseling is one of the best ways to manage your debt, and it’s typically free, provided by non-profit organizations.
How Credit Counseling Works
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Credit counselors are typically non-profit organizations that help you manage debt and provide a clear roadmap to help you eliminate debt. This type of debt relief is very different from debt consolidation loans or debt settlement, which both have severe disadvantages. Here’s how it works:
Budget Analysis and Recommendations
Your credit counselor will ask to review your budget, which includes income, bills, loan payments, entertainment expenditures, and more. They will effectively see money coming in, and where your money goes. This is beneficial to you because financial experts can often see ways to reduce your bills, debts and expenditures without sacrificing your lifestyle. Once the counselor has a full view of your budget, they can begin offering you a plan to improve your budget, potentially saving you hundreds of dollars, and sometimes thousands, in monthly costs.
Credit Report/History Review
Next, your credit counselor will ask to review your credit report and history. This is also beneficial because they can suggest solutions to improve your credit score with the three big credit bureaus (Experian, Equifax and Transunion). You can get a head start on this by checking out our guide on getting your free credit report. After reviewing your credit report, they may offer suggestions and provide solutions to:
- Dispute negative items on your credit report
- Provide letter templates to dispute negative items on your report
- Review your total debt and provide debt payoff plans
Debt Management Plan (DMP)
In addition to providing debt payoff plans and budgeting tips, credit counselors may suggest what’s called a Debt Management Plan. Here’s how a debt management plan works.
- Counselor reviews your budget, credit history and all finances
- Counselor makes recommendations to improve your budget and credit score
- Counselor contacts creditors on your behalf to help reduce interest rates
- Provides you with funds to eliminate your debt, leaving you with one lump sum payment every month
Advantages
- Can typically cut your interest rates in half (yay!)
- With the help of experts, you can pay debt off much faster than going it alone
- If combined with a DMP, effectively consolidates all of your payments into one lump sum payment every month
Disadvantages
- Is not a quick solution. It takes time and can usually take anywhere from 2-5 years, depending your your financial situation. So you must be committed during this time.
What to Look For
When looking for a reputable, non-profit credit counseling organization, ensure they meet the following requirements:
- Make sure they are a legitimate non-profit
- Make sure they don’t charge fees for educational material
You should also check to make sure they are accredited by the below organizations.
Beware of Credit Counseling Scams
In the credit repair world, scams run rampant. Here’s a few things you should be mindful of:
- Watch our for profit-based companies posing as non-profits
- Avoid companies that charge higher than average fees (if they even charge a fee)
- Review the company’s BBB profile.
- Be cautious of companies that guarantee fast results