If you’ve never heard of — or are only vaguely aware —of what consumer credit counseling is, you’re not alone. This service tends to fly under the radar as an option for people who are struggling to pay off credit card debt. In many cases, they only learn about it when they really need it in the form of a referral from a creditor. Many folks wonder if it’s a legitimate service or if it really can help them get out of debt. Let’s review the pros and cons of consumer credit counseling services.
PROS
Unbiased, Nonprofit Assistance
Nonprofit organizations provide credit counseling, so you can trust the solutions they suggest are in your best interest, and not intended to service their bottom line. To provide nonprofit credit counseling, agencies must be accredited. You should look for an agency that belongs to the National Foundation for Credit Counseling (NFCC) and/or the Financial Counseling Association of America (FCAA).
Consumer credit counseling is a confidential, free service. If someone tries to charge you for the service, it’s not nonprofit credit counseling.
Personalized Attention
Certified credit counselors provide clients with personalized, one-on-one attention. A typical credit counseling session takes place over the phone and includes reviewing a client’s income, expenses and debts, formulating a realistic budget based on that information and discussing possible solutions to better manage and repay debts.
Some credit counseling agencies also offer the option of completing self-guided, online credit counseling. You’ll complete a similar process to phone counseling, but you can go at your own pace, whenever it’s convenient.
Availability of Debt Management Plans
In some cases, one of the options to pay down debt may be a debt management plan. Clients on debt management plans work with the credit counseling agencies to pay off credit card debts enrolled in the plan.
The main benefit of a debt management plan is the lower interest rates credit counseling agencies negotiate with creditors. This allows more of every monthly payment to go toward paying the principial, which allows clients to pay off debt more quickly than they could on their own.
Additional benefits include the convenience of making a single monthly payment and peace of mind knowing the agency is handling all communication with creditors or collection agencies.
CONS
Potential for Limited Assistance
Consumer credit counseling and debt management plans are designed primarily to help consumers experiencing problems with credit card debt. If you’re dealing with other types of debt issues, such as medical debt or back taxes, consumer credit counseling may not offer the solutions you’re looking for.
Possible Scams or Fraud
Any time you’re sharing personal and financial information, the chance for fraud or scams exists. Be sure you are dealing with a certified credit counseling agency with membership in the NFCC and/or FCAA. Also be sure to check with the Better Business Bureau (BBB) and read independent online reviews for the agency before you start the process.
Possible Initial Credit Score Drop
Going through credit counseling will not have any direct effect on your credit report or score. If the credit counseling agency recommends a debt management plan and you choose to sign up, you’ll be asked to close all the credit card accounts enrolled in the plan. This could cause your credit score to drop initially. But as you proceed on the plan and begin making progress toward paying your accounts in full — and making all payments on time — your credit report and score will reflect these positive habits.
