If it’s difficult these days to pay your monthly bills on time, let alone keep groceries in the fridge and gas in the tank, you’re not alone. But don’t let financial stress lead you straight into the open arms of credit counseling and bankruptcy. If you’ve been thinking about getting debt counseling, there are a few things you need to know. For example, what credit counseling is, how it works, and why there’s a better way to deal with your debt.
What is credit advice?
Credit counseling is the process of working with a credit advisor to manage your debt and avoid bankruptcy. You could say credit counseling is like therapy – but for your finances.
If you choose credit counseling, you will need to ask a third party (credit counselor) to look through your finances and help you come up with a sensible plan to pay off your debt. Sometimes this looks like a debt management plan (DMP), and sometimes it looks like working with your advisor to learn the basics of personal finance so you can better manage your bills.
How does the credit advice work?
Credit counseling is often a person’s last-ditch effort to save their finances from bankruptcy or foreclosure. (However, if you want to file for bankruptcy, you may still need to take credit counseling.)
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When you’re deep in debt and debt collectors can’t get rid of you, you might be tempted to think that getting a credit counselor is the next step in the right direction. (But it’s not the help you really need.) Here’s how it really works:
1. Gather all your information.
The first thing credit agencies will ask you to do is collect your financial information – everything. Your bank statements, your credit card statements, your mortgage payment information, what you owe (and to whom) and anything else you can think of. You’ll want to go through every single detail to get a complete picture of how your finances look.
2. Make an initial appointment.
After you have decided which credit counseling center you would like to work with, make your appointment. Most agencies offer in-person and virtual appointments. The first appointment is like getting to know each other. You’ll show them your finances, hear about your options, and decide if you want to work together. This appointment is a good time to ask questions like: are they accredited? What fees do they charge? What services do they offer? Will they just offer a debt management plan or will they walk you through the process?
3. Create an action plan.
Next, you will work with your loan advisor to create a personal plan of action to get out of debt. Many credit counseling services will educate you about personal finance and budgeting, show you how to manage your debt, and create a debt management plan (DMP) to help you dig yourself out. Not all credit agencies will urge you to DMPs right away, but you should watch out for those that do. (Psst…debt management plans aren’t the way to go, but more on that later.)
Does credit counseling really work?
Here’s the deal: There are no silver bullets or quick fixes when it comes to getting out of debt. Many people think that working with a credit counseling agency is a quick fix to get their finances back in order. But that couldn’t be further from the truth.
In fact, working with a debt counseling service is more likely to do you (and your finances) more harm than good. Not only does it hurt your credit, but (with some credit counseling services) it also takes longer to get you out of debt than it would if you pulled up your bootstraps and got to work yourself.
Not to mention that finding the right loan advisor will require you to weed out the scammers. Sure, you might think that opting for a nonprofit organization is the safe bet — but think again. Even non-profit agencies are not always trustworthy. Some agencies hide their fees and others brazenly overcharge you. And then there are other agencies that just take your money and run away.
What credit advisory services are there?
Now that you know what credit counseling is and how it works, let’s dive into the type of credit counseling services that agencies offer. Some agencies focus solely on debt management plans, while others offer a variety of services focused on specific areas where you may need help.
Here are some of the top services these agencies offer:
Profit-oriented vs. non-profit credit advice
If you’re looking for a credit counselor, you won’t find a shortage of options. There is a ton from agencies out there. What’s more, some are for-profit and others non-profit.
As we said before, the nonprofit agencies sound kinda less scary, right? Sure, on the surface. But remember, just because it’s a nonprofit doesn’t mean you should trust them right away (or that it’s free). Nonprofit agencies still have fees associated with their credit counseling services. And they work with lenders (like credit card companies) to ensure most of their services get paid for. Yes, you read that correctly. Creditors and credit advice centers maintain friendly relations. But usually (if they’re reputable), nonprofit credit agencies won’t push you for a specific service.
For-profit credit agencies don’t try to hide the fact that they want your money — even if you’re already in debt to the eyeballs. Most will try to rush you into a debt management plan because they will make more money off you.
Other debt management plans
Debt management plans are just one example of how loan advisors try to “help” you get out of debt. With a DMP, you set up a payment program with your loan advisor in hopes of paying off your debt in three to five years. Your loan advisor will negotiate with your creditors on your behalf to try to lower the interest rate or take care of those late payment fees. Oftentimes, your advisor will pause paying your debt (causing you to charge you late fees on top of late fees) just to have some bargaining power. Your logic is why should your creditors negotiate lower payments if you have no trouble making them? During the course of your DMP, you make payments to your advisor or agency and they make your payments for you (for a fee, of course).
But a DMP isn’t the only debt reduction option that credit agencies offer. They also offer things like debt settlement (where they pay off your debt at a fraction of what you owe) or debt consolidation (where they combine your debt into one “simple payment” and one interest rate).
Listen up no matter what type of debt management plan you’re considering. . . There is a better way. And it doesn’t include debt settlement, a DMP, or even credit counseling. All it takes is hard work to stand up for yourself and your family and a dedicated commitment to finally get out of debt.
The best way to deal with debt
The best way to deal with debt is to hit a monthly budget, increase your income, and use something we call the debt snowball to reduce your debt.
This is how it works:
- List your debts from smallest to largest (and don’t worry about the interest rate).
- Make minimum payments for all but the smallest. Then put every extra penny you have on the smallest one until it pays off in full.
- Roll the payment you made for that debt into the payment for your next smaller debt.
- Repeat for the next smaller debt and keep going until you scream, “I’m debt free!”
The best thing about the debt snowball method is its momentum. Sure, you might have thousands of dollars to pay back, but if you spend extra money on that first little debt every month, you’ll eliminate it in no time. And when you do, it will feel so good. That feeling right there will keep you going until you are completely debt free. Guys, this finish line is so cute and worth it. Well, this is debt help that actually works!
No matter what your debt, the best thing you can do for yourself and your family is to budget. Budgeting gives you permission to spend each month (while also making sure your spending doesn’t get out of hand). EveryDollar is a free budgeting tool that helps you create a plan, track your spending, and meet your financial goals. By creating a budget, you’re not just setting out a plan for the month—you’re preparing for one lifespan of financial peace.
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