Credit counseling is a professional service from a credit counseling agency. In the US, there are many good credit counseling agencies, most being non-profit organizations. They provide two main services:
- Education on personal management of finances and credit, including credit cards.
- Debt Management Plans (DMP)
The US federal bankruptcy reform of 2005 requires that any individual filing for bankruptcy, or seeking final discharge from Chapter 13 bankruptcy, must first obtain credit counseling. This can only be obtained from a non-profit credit counseling agency registered for this purpose. However, any bankruptcy lawyer can refer you to an appropriate agency.
Good credit counseling agencies offer debt consolidation services. Many agencies also serve their communities by providing housing counseling (under HUD) and/or a variety of other services.
You can choose from many good credit counseling agencies. You should insist on dealing only with an agency that offers all the services you may need.
Credit counseling and education
Licensed professional credit counselors educate through individual counseling – in person or by phone or Internet. They prefer to do it in person, to be sure that they understand the client and communicate what the client really needs. However, the client’s location or cost pressures can make phone or Internet counseling the only feasible way to go.
Credit counseling agencies also educate through books, seminars, and a wide variety of courses and on-line tools. Many of these are available free on the Internet, and can help greatly to get your finances in order by yourself.
However, many people have a difficult time identifying their financial problem areas, and therefore struggle to find ways to fix them. Credit and debt counseling will help you visualize what needs to change, and help you develop a plan to get back on track. Credit and debt counseling services focus not only on the problem at hand, but also on prevention of future problems.
With the help of counseling, you may find ways to repay your debts through careful money management and budgeting, or though using the agency’s debt consolidation service. This will preserve or even enhance your credit rating.
Debt Management Plans
A Debt Management Plan (also called Debt Management Program) is an arrangement made by a credit counselor between you and your creditors. You make a single monthly payment, and the counselor makes payments to the creditors. Because the credit counselor is involved, creditors feel more sure of the payments, and may accept less than the total amount owed.
A DMP is generally completed within five years, often less than four years. At the end of this time, your debts are discharged.
For example, if you owe $20,000 to five different credit card companies, the credit counselor would create a Debt Management Program for you where you pay the credit counselor, say, $500 per month, the money is distributed to your creditors, and over a 40 month period all of your debts are paid off.
Because you resort to a credit counselor for a DMP and generally pay less than you owe, your credit rating will suffer. Obtaining future credit will be more difficult or be at higher interest. However, this option is not as damaging as going bankrupt.
Try our tips on how to be successful in a Debt Management Plan.
Basic credit management advice
The credit and debt management advice from a credit counselor is likely to include these tips:
- Use your credit card intelligently to develop a good credit history.
- Review each credit card bill carefully, and pay them at the same time to identify any problems in the bill.
- Obtain your credit report and review it. If there are any mistakes with your credit card or other debts, be sure to contact the credit rating agency immediately.
- If you already have debt on multiple credit cards, stop applying for new ones.
- If you use more than one credit card, transfer your balance to the card with the lowest interest rate.
- Consistently pay your bills on time, as credit card companies can raise your interest rate if you don’t.
- Special cards like those from department stores and gas stations should be avoided as they carry higher interest rates than normal cards.
- If you begin to lose control of your debts, contact a credit counseling agency for assistance.
How can I decide my next step?
If you have not done so, try our credit counseling calculator for an indication of whether you qualify for a Debt Management Plan. If the answer is yes, consult a credit counseling agency.
If the calculator and other information on this site indicate that you probably don’t qualify for a DMP, explore bankruptcy in our step 3. Then you can make an informed decision, whether to approach a bankruptcy lawyer or go first to a credit counseling agency.