The Bottom Line on Credit Counseling?

Credit Counseling Pros & Cons

If you have accumulated debt that you are struggling to pay down, or if your minimum monthly credit card payments are more than you can afford to pay, credit counseling might be a path to consider.  It certainly sounds like a responsible approach.

But before you make the call, let’s look at the full picture.

What credit counseling IS and IS NOT

In general, credit counseling is not about escaping your debt. It’s about financial education, changing spending habits, improving credit, and much more. In fact, different organizations provide varying levels of service, causing some confusion over what credit counseling really entails.

According to the Consumer Financial Protection Bureau, credit counseling organizations are usually non-profit and “offer free educational materials and workshops.” But they are quick to note that credit counselors may charge fees for a debt management plan.

It’s hard to see the downside in participating in a 1-hour free session to discuss your income, debt, and credit score with an expert. But you need to know the expert could steer you toward a prescription that will come with a price.

What are the alternatives?

It’s impossible to weigh the pros and cons of credit counseling without acknowledging debt management plans and bankruptcy, as they are the primary alternatives.

Debt management plans (DMPs), which we’ve noted are sometimes recommended by credit counselors, are a more aggressive approach to dealing with debt.  A DMP reduces actual debt by settling on a reduced lump sum payment to creditors, or at least reduces monthly payments.

A DMP can have a negative impact on your credit score, but then again, so can having too much debt.

Personal bankruptcy is that bitter-sweet, double edged sword. It is absolute debt relief (with certain exceptions such as alimony), but comes with a devastating impact on your credit score for a lengthy time.

Think of credit counseling as a means to get out of debt while avoiding bankruptcy.  A debt management plan, however, could either be an alternative to credit counseling, or the result of credit counseling.

 

Credit counseling can save your credit score

Credit counseling, if we’re really just talking about financial advice and not debt management, can guide you out of debt and will not damage your credit score. That’s a huge win, since protecting your credit score while reducing debt is the whole point.

A credit counselor can review your finances, analyze your debt, and make confidential recommendations that never show up on your credit report. Depending on your situation, you may find that heeding a credit counselor’s advice is the only way to climb out of debt AND improve your credit score at the same time.

Throwing good money after bad?

Your creditors are not the only ones profiting from your debt. According to IBIS World, the Credit Counselors, Surveyors, and Appraisers market is a $53 billion industry. This is not in itself a bad thing, but it does serve as a reminder that the credit counselling business has more than just your own finances in mind.

Experian, a leading global information services group, warns debtors of credit counseling organizations that put pressure on clients to enter debt settlement programs or that charge “substantial up-front fees.”  It stands to reason that if credit counseling is generally free and counselors can recommend their own paid services, you’re going to find some companies struggling to deal with the conflict of interest.

Netting the pros and cons

Debt seems to be a way of life these days.  It isn’t out of the ordinary for a family to owe on its mortgage, car loans, school loans, and credit cards all at the same time.  A 2016 study by Nerdwallet claims that Americans owe over $12 trillion in personal debt, or an average of $134,643 per household.

There are several approaches available to those suffering from excessive debt or credit problems. Bankruptcy, debt management, and credit counseling should all be on the table. Understanding the pros and cons of your options is crucial to finding the best path for you.

Now that you know some of the benefits and pitfalls to working with a credit counselor, you’re ready to decide if credit counseling is right for you.  If it is, the Federal Trade Commission offers some great tips on their website for choosing a credit counselor.

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