3 Ways Credit Counseling Can Soothe Financial Stress

amount of revolving debt in america

If you're trying to get out of credit card debt, and you're having trouble making your minimum payments, it might be time to consider getting credit counseling.

According to the Federal Reserve, as of February 2012 Americans had overĀ $800 billion in outstanding revolving consumer debt. While most Americans are able to use credit cards as a tool to manage their cash flow, some people find themselves getting into too much credit card debt.

According to Bank of America, there are a few signs that you might need credit counseling:

1. You're having trouble making minimum payments on your credit card debts

2. You are late paying bills

3. You are getting calls from creditors and collections agencies who are demanding payment you cannot afford

Credit counseling is one of the ways that people can get help to get out of credit card debt. Credit counseling offers a few solutions to help you manage your personal finances.

Here are a few of the ways that consumer credit counseling can help:

Offer financial advice - with no fees

how credit counseling works

Credit counseling agencies are almost always non-profit organizations that typically do not charge upfront fees for their work. The credit counseling service makes money by getting paid fees from the creditors (banks and credit card companies) that benefit from getting repaid by customers - instead of having their customers declare bankruptcy and fail to pay back their credit card debts.

When you work with a consumer credit counseling service, they will give you free financial counseling by taking a look at your overall financial life, talk with you about your monthly spending, and help you set up a monthly budget. This basic financial counseling can be a helpful first step for many people. According to the Cambridge Credit Counseling Transparency Report, 94% of their clients said working to set up a budget and getting help with analyzing their spending was helpful to them in managing their finances.

If you need additional help, a credit counseling service will take the next step of talking with you about a Debt Management Plan.

Set you up with a Debt Management Plan

setup your debt management plan

Credit counseling can help you decide the best way to approach your credit card debt. It might make sense to repay your credit card debt with a Debt Management Plan. The way a Debt Management Plan works is that the consumer agrees to repay debts over a period that often lasts up to five years, while making a single consolidated payment each month. The credit counseling service manages the repayment of your various debts out of this one monthly combined payment. When you agree to sign up for a Debt Management Plan, the banks and credit card companies often agree to waive fees and lower your interest rates, which makes it more affordable to pay down your debts. For example, according to the Cambridge Credit Counseling transparency report, clients "received interest rate reductions averaging 14.49%. As a result, the average new client's payment was $141.58 less than what they had been paying on their own."

Help improve your credit score

Debt management plan can improve credit score

Credit counseling and debt management plans are often confused with debt settlement services. The difference between a debt management plan and a debt settlement service, is that with a Debt Management Plan, you agree to repay the full amount of debt that you owe - so your credit score will get better over time as you pay back your debts. With a debt settlement service, the company works with your creditors to negotiate a reduction in the total amount of debt that you owe. But one of the risks of debt settlement services is that it can hurt your credit score if you do not repay debts while waiting to negotiate a debt settlement. The Debt Management Plan offered by a consumer credit counseling service might be a better option if you are concerned about getting out of debt while also improving your credit score. People who sign up for a Debt Management Plan can see a significant increase in their credit scores and are less likely to declare bankruptcy, according to a Consumer Federation of America- and American Express-sponsored study of credit counseling clients.

The study found that customers who signed up for a Debt Management Plan had an average increase in credit score of 59.4 points during the next three years (compared to 39.7 points for people who did not do a DMP. Also, among credit counseling customers who signed up for a Debt Management Plan, 15.9% declared bankruptcy during the next three years (compared with 28.4% of people who did not commit to a DMP).

Consumer credit counseling is not an overnight solution or a "quick fix" to credit card debt. If you want to go through with credit counseling, you need to be prepared to cut back on your spending, possibly take on an extra job, and otherwise live within the limits of the budget laid out for you by your Debt Management Plan. But if you are willing to make the lifestyle changes needed, and you're ready to work hard with earnest effort to get out of credit card debt, credit counseling can be an effective way to get out of debt while improving your credit score.