The term "credit counseling" is often misinterpreted. Many people think that credit counseling helps people repair their credit. Although this can be a residual benefit of the services of credit counseling agencies, it is not the primary goal. Perhaps we should have taken a cue from the United Kingdom who refers to it as "debt counseling" because, in essence, that's really what it's all about.
A Brief History of Credit Counseling
What is Credit Counseling? It has been around since the early 1950's. It was actually created by credit grantors to promote financial literacy and help consumers avoid bankruptcy. The current credit counseling model didn't really start to take shape until the early 1960's when the first local agencies began to surface. These agencies began offering financial education and counseling to consumers in a face-to-face environment.
Credit Counseling has evolved substantially since its inception. While the current model still focuses on financial education as its main objective, people seek assistance through these agencies because they need help to get out of debt. Over the decades, credit counseling agencies have developed and cultivated relationships with creditors in an effort to collectively help consumers get out of debt in the fastest possible timeframe through the establishment of debt management plans, or DMPs (more on DMPs a little later).
About Credit Counselors
In the past, the credit counseling industry had very little regulation. As a consequence, you really didn't need any formal training or education to be a credit counselor. It was up to the individual agencies to hire competent people and train them on "how to be a credit ccounselor. Fast-forward to today's credit counseling environment and you'll find that credit counseling agencies are some of the most highly-regulated businesses in the country, as are their counselors. Reputable credit counselors are certified professionals who undergo extensive education and training, and are considered experts in the field of debt relief.
A reputable credit counselor will perform an extensive evaluation of a consumer's complete debt profile. They'll review their income, all of their expenses and help them to develop a plan of action that's most suitable to their unique situation. They'll engage the consumer by having them journalize their monthly expenses to see where they are spending their money, which will help them to figure out where they can cut costs. They'll also help them to develop a workable household budget and help them to develop a plan to save money. These services are typically free, but it's always a good idea to ask the agency you choose before committing to a session.
What's a Debt Management Plan
To curb any confusion, a debt management plan, or DMP, is NOT credit counseling, although the establishment of a debt management plan is one possible outcome of a credit counseling session. If, upon a thorough review of a consumer's debt profile, a credit counselor determines that they would benefit from a DMP, only then should one be offered. If the consumer simply has too much debt and doesn't have the income to support minimum payments through the plan, unfortunately bankruptcy may be in their best interest, although a consultation with a bankruptcy attorney is the only way to truly determine that.
If a consumer enrolls in a DMP, they'll make one monthly payment to the credit counseling agency who will then disburse individual payments to each of the creditors included in the program. Creditors work with agencies to determine the benefits they will extend the consumer. These benefits can include:
- Reduced Interest Rates
- Elimination of Late and/or Over-Limit Fees
- Re-aging of past-due accounts to a current status
- Saving money
These benefits help consumers in several ways, but the ultimate goal is to get them to pay off their balances within a reasonable timeframe, and within their budget. Typically, the terms of the DMP are set to ensure that the consumer's debts are paid off completely in a 4-5 year timeframe. To put this into perspective, it can literally take decades for a consumer to pay off their accounts in full if they make only the minimum monthly payments on their accounts, which is quite common. Since most of the minimum payment goes toward the interest that creditors are charging, very little, if any, of the money goes toward paying down the principle balance. However, with a reduced interest rate (sometimes as low as 0%), more of the consumer's payment is applied toward the principle balance, thereby shortening the repayment time significantly.
Does Credit Counseling or Debt Management Plan Administration Work?
This question does not have a straight-forward answer because it really depends on the agency you choose to work with. Like any other business, some are certainly better than others. This is why it's so important to do your research. When looking into a credit counseling agency, you'll want to find answers to a few questions:
Does the Credit Counseling Agency Have a Good BBB Rating?
Do a search on the Better Business Bureau's website to see what their rating is and determine if they have a lot of complaints and whether those complaints have been resolved. Typically businesses with an "A" or an "A+" rating are a safe bet with regard to how they are viewed by consumers.
Is the Credit Counseling Agency Recommended by Others?
There are many consumer review sites that will be a good starting point to finding out an agency's reputation. Do a search on a site like ConsumerAffairs.com to see if the company has a high rating and if others like you have posted any comments about their experience with that agency. Take the time to read through some of the reviews you find because this is one of the best ways to get a feel for whether or not that credit counseling agency is a good fit for you.
Is the Credit Counseling Agency Licensed in Your State?
Most states have laws and regulations governing credit counseling agencies that provide service to their residents. Some agencies operate on a national scale, so they are likely licensed in all states in which they do business, but always be sure to check. (Click here to view our licenses and disclosures.) You should be able to find licensing information on the agency's website. If not, check with your state's Attorney General's office to verify that they have been granted a license to operate in your state. Keep in mind that some states do not have licensing requirements, but it's always a good idea to check.
Does the Credit Counseling Agency Charge Excessive Fees?
First, remember that credit counseling and debt management plan administration are two different services. Most reputable non-profit credit counseling agencies will offer a free debt analysis as part of their charitable mission. If you are working with an agency that charges a fee for the debt analysis, it's probably best to keep looking. However, there are almost always fees associated with the establishment of a debt management plan.
Fees for debt management plans are usually regulated by each individual state, so be sure that the agency is following these regulations. For most agencies, there are two fees associated with this service: an enrollment, or "initial" fee, and a monthly maintenance fee. Again, these fees may vary from state-to-state and from agency-to-agency, but generally the initial fee is no more than $75 to set up the account and the monthly fee is usually no more than $50.
Are the Credit Counselors Certified?
This is yet another very important question to ask. Be sure that the credit counselor is certified by a third-party, such as the Partnership for Financial Education (PFL) and that the license is current. Counselors will typically have to perform continuing education once they receive their license to ensure that they are kept up-to-date with any changes to the industry.
Choosing a Credit Counseling Agency Seems Like a lot of Work!
It's true that choosing a credit counseling agency is not as simple as going to the store to try on a new pair of shoes. There's a lot to consider, but think about the importance of that decision. Following these guidelines will help to ensure that you're dealing with an agency that can actually help you get out of debt in a reasonable amount of time and hopefully save some money in the process. So, take just a little bit of time to do some research. Check the BBB. Check with ConsumerAffairs.com and read the reviews. Look at their website to determine licensing. Remember, if it feels wrong, trust your instincts and keep on looking. There's no quick fix to getting out of debt, but choosing the right credit counseling agency can make all the difference in the world.