4 Credit Counseling Myths, And The Facts Behind Them
If you are struggling to make your payments or have a large consumer debt, you may be considering visiting a credit counselor. Additionally, consumers beginning bankruptcy proceedings are required to attend credit counseling through a counselor approved by the United States Department of Justice U.S. Trustee Program.
However, many people head to a credit counseling agency without a clear understanding of the process and unrealistic expectations. Others don't seek out credit counseling services that could help them get on track because of incorrect assumptions.
Here are the facts on four common myths about credit counseling:
1. Myth: Credit Counselors Can Wipe Out My Debt
Fact: When working with a credit counseling service, your debt is not automatically forgiven or "wiped out." However, one option for consumers who are unable to repay the full amount that they owe each month is for a credit counseling agency to set them up on a Debt Management Plan (DMP).
"In a DMP, you deposit money each month with the credit counseling organization. It uses your deposits to pay your unsecured debts, like your credit card bills, student loans and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees," according to the Federal Trade Commission. "But it's a good idea to check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you." Andrew Housser, CEO of Freedom Financial Network says that the agencies maintain pre-arranged agreements with credit card companies that allow them to lower interest rates on existing debt to a creditor-issued "concession rate."
2. Myth: I Will Get Only Financial Advice from my Credit Counselor
Fact: Because the word counseling is in the title, many people assume that credit counseling is only getting advice from someone about how to get out of debt. Different credit counseling agencies offer different services and approaches for their clients. "Our members provide clients with written action plans with various steps so they can take concrete steps of reaching out to creditors and negotiating fees," says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC). "We really focus on providing financial education and helpful solutions."
Other credit counseling services are for-profit companies that focus on setting up consumers with a DMP to reduce consumers' monthly payment obligations and spend less time on financial education, says Housser. Before signing up for credit counseling, determine what type of services you need and ask questions to determine which organization's approach fits best with your situation.
3. Myth: Credit Counseling Services are Expensive
Fact: This is a potential barrier for some people considering credit counseling services, with about one in five respondents to the National Foundation for Credit Counseling 2013 Financial Literacy Study saying cost might prevent them from getting help. Some nonprofit credit counseling agencies offer free or inexpensive counseling services, including more than 750 locations associated with NFCC. "The vast majority of our members do not charge any fee for services and those that do require payment are typically in the $20 range. One of our member quality standards is that no person can be turned away because of inability to pay. If someone truly cannot pay even $20, then the fee is waived," says Gail Cunningham, spokesperson for the NFCC.
Most for-profit credit counseling companies will charge reasonable fees for their services and debt management programs. However, some for-profit credit counseling agencies can charge high fees and not all will readily disclose the amount being paid towards fees in the consumer's monthly DMP payment. "I worked with a family who was paying $371 per month to a credit counseling agency and didn't understand why the debt wasn't going down. When we looked at the paperwork, we found that the majority of the payment was going to fees," says Wayne Sanford, credit repair expert. "You must look carefully at any paperwork before you sign to see how much money is going into fees for the credit counseling company."
4. Myth: Attending Credit Counseling Will Hurt Credit Score
Fact: According to MyFico.com, using a credit counseling service and having it noted on your credit score does not decrease your FICO Score. However, the website also cautions that the actions you take based on a credit counselors recommendation could affect your score, such as settling for lesser amount, partial payments and any late payments.
"Even though it doesn't reduce your score, when a lender notes in the remarks on your report that your bills are being paid by a counseling agency, then a future lender may be hesitant to extend credit because you had a third party paying your bills," says Sanford. "Read your paperwork carefully and understand that the decisions you make will affect how future creditors look at you tomorrow."