Much appreciation goes to Clearpoint Credit Counseling Solutions for sponsoring today's post! All opinions are mine.
The Four Things You Need To Know About Credit Counseling
Let me just start by explaining what credit counseling is. Credit counseling can mean a lot of things, either good or bad. The most basic definition is that someone is advising you on how to manage your debt and credit. In the right situation, credit counseling can be an absolute blessing that lets you take control of your debt. In the wrong situation, credit counseling can cost you a lot of money and heartache.
My goal in this post is to help you decide if credit counseling is right for you.
Here are the four most important things you need to know about credit counseling.
Know how to find a good credit counseling agency.
There are tons of scams out there for “debt relief,” which can include credit counseling, debt settlement and credit repair. As a general rule, when someone promises you something that’s too good to be true (i.e. Pay me $600 and I’ll completely clean up your credit!”) it’s a scam. This is why you’ll almost always want to avoid credit repair and debt settlement agencies. An easy way to make sure that you don't get involved with them is to only do business with a credit counseling agency that's accredited by the National Foundation for Credit Counseling (NFCC). Then run the name of the agency through the Better Business Bureau (BBB) to ensure that have a high rating.
The company that I recommend to my readers is Clearpoint Credit Counseling Solutions (who are, of course, accredited by the NFCC and have an A+ rating with BBB).
Word of caution: Credit counseling agencies using a nonprofit status to look trustworthy is common. The good agencies will be nonprofit, but just because a company is non-profit doesn't mean it's a good agency. A nonprofit has no cap on what they set their salaries at, so nonprofit doesn't necessarily mean that it's a good agency. Stick with the NFCC and BBB rating to choose a counselor.
Know the benefits of credit counseling.
There are quite a few benefits to credit counseling, although each person's situation is unique. Here are a few of the common benefits:
- Reduced interest rates
- Reduction of monthly payment
- The ability to pay multiple debts in one monthly payment.
- Eliminating finance charges.
- Relief from collection agencies.
- A plan that will have you debt free (for unsecured loans like credit cards) in less than 5 years.
Know the risks of credit counseling.
Technically credit counseling itself doesn't count against your credit history, but you may take a short-term hit to your credit score because they require you to close all of your credit card accounts. Closing all of your accounts means that your credit score can drop. The good news is that, typically, your credit score bounces back pretty quickly, as the result of making on-time payments and lowering your credit utilization. In fact, Clearpoint’s clients increase their credit scores by an average of 61 points during the first year of the program
All of this is important to remember if you're planning to buy a house or a car during your time on the program.. In most cases, people who are considering credit counseling aren't in a position to buy either, but every situation is different so it's worth mentioning.
Credit card companies may also put a note in your credit report that your debt is being managed. This has no effect on your score, but future lenders would then know you were in the program. How that affects you is left up to the lenders interpretation. Some lenders may see that as a good thing, some may see that as a bad thing.
That being said, if you're considering this, then you likely don't have great credit anyway and once you complete the program your credit score would likely be in a much better position than it is right now.
For alternate ways to build your credit score without closing your credit cards, I highly recommend this resource from Credit Knocks.
Know if credit counseling is right for you.
Now that you know the risks and rewards, you can see that credit counseling isn't right for everyone. My recommendation is that you consider credit counseling if you have more than 20% of your take home pay going to unsecured debt (like credit cards) and you’re having trouble making the payments.
If you're in a situation where you feel hopeless or overwhelmed with debt, then this is absolutely something I would recommend to you.
What will happen after I sign up for credit counseling?
- You’ll have an interview so the counselor can get a full picture of your financial situation. They'll go over your full income, all of your expenses, and debt. They’ll help you create a very detailed budget.
- They’ll request to pull your credit report so they can see where you are right now.
- They’ll provide you with your current credit score and review it with you.
- They’ll develop a debt management plan and work with your creditors to help improve your situation. Their goal is to help you have your debt paid off in 5 years or less. They may reduce your interest rate or reduce your monthly payments, sometimes significantly.
- You'll have the option to accept the debt management plan or decide to go your own way.
- If you accept it, they'll help you implement the debt management plan.
Some things to think about:
Using a credit card will no longer be an option. You won't have a single credit card to your name (your accounts will be closed). I actually think that's a good thing. It forces you to take your finances seriously. Think of all the things you bought this week; would you have made those choices if you knew that you would have nothing to fall back on if disaster hit. That moment- where spending money that you don't have scares the heck out of you is where real change is made.
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