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Credit Counseling

Credit Counseling
A Debt Management Tool, but With Drawbacks.

Helps Your Finances . Not Your Balances.

No Debt Reduction

Credit counseling is a debt management tool that can help you manage your money and create a plan to pay off your debt. Credit counseling won’t reduce the amount of debt you owe. They’ll work with you to create a strategy to manage your credit and pay off your debt. Sometimes it is paired with a debt management plan (or DMP), which may incur an additional fee, even if it is done through a non-profit agency. There are many options for credit counseling agencies. It’s best to do your research and find one that is in good standing with the Better Business Bureau. You will also want to make sure that they are accredited by the National Foundation of Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

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Important information that you need to know.

A Deeper Look at Credit Counseling

If your credit counselor reviews your financial information and determines that a DMP is the best route for you, they will work with your creditors to negotiate payment terms that work within your budget, including lower monthly payments or lower interest rates. If your creditors agree to the DMP, you would send your monthly payment to your counseling agency and they would distribute payments to your creditors. The benefit is that your creditors would no longer be contacting you. The downside is that it typically takes between three to five years to complete the process. And, your credit counseling agency can require you to give up your credit cards until you’ve completed your DMP.

Concerned man wearing military fatigues speaking with a counselor.

Self-Served Interests?

Credit counseling firms are compensated by the credit card companies themselves.

They are paid a fee for your on-time payments. CBS News reports, “The biggest source of incomes for debt counseling services come from the credit card companies themselves. Creditors kick back a percentage of each monthly payment to the debt counselor. The credit counseling company wants to place you in a debt management program, so it can earn money from creditors.”

Be sure you do your homework when choosing a credit counseling service to ensure you’re being fairly represented.
There's upsides and downsides. Let's take a look.

Pros and Cons of Credit Counseling

Positive Impacts

Potential Cons

The Bottom Line on Credit Counseling

Though it is hard to come up with firm numbers, it is estimated that about 25% of consumers that enroll in DMPs complete them successfully. Ask the credit counseling service about the completion rate of their clients and be honest with yourself whether the monthly payment they demand is one you can afford to make each month.
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