Everything You Need to Know About Credit Counselors

If budgeting troubles or financial curveballs such as medical issues, divorce and major home repairs have left you struggling with debt, you may need help getting back in the black. A credit counselor can work with you to set up a budget and payment plan to resolve outstanding debts and plan for a better financial future. Here’s a look at what credit counselors do and how you can get one.

What Is a Credit Counselor?

Credit counselors are trained to offer advice on debt management, budgeting and consumer credit. Through one-on-one counseling, workshops and educational materials, they can set up a plan that’s unique to your situation.

Through credit counseling, your income, assets and debt are analyzed to determine the best way to address financial issues, says Mike Sullivan, a personal finance consultant with Take Charge America, a nonprofit credit counseling and debt management agency based in Phoenix.

Peter Klipa, vice president of creditor relations for the National Foundation for Credit Counseling, says assistance from a counselor could be as basic as helping you understand your income and expenses, and setting up a budget. Counselors can also advise on issues such as student loan debt, reverse mortgages and starting a small business.

Who Usually Works With Credit Counselors?

Debt-related issues are usually the main reason people seek out credit counselors.

More than half of the consumers who participated in the 2018 NFCC Consumer Financial Literacy Survey said they have had credit card debt in the last 12 months. The same survey found about one in four U.S. adults said they would get help from a professional nonprofit credit counseling agency if they were having debt-related financial problems.

If you need help from a credit counselor, it’s a good idea to seek it out early in the process, as the best financial options dwindle with each missed monthly payment.

“Credit counselors specialize in credit card debt, so you should reach out as soon as you become concerned about the amount of credit card and other unsecured debt you have,” Sullivan says.

[Read: The Best Credit Cards for Bad Credit of 2018.]

Klipa says consumers who contact credit counselors usually have about $10,000 to $15,000 in credit card debt on multiple cards. Consumers in dire situations may be trying to figure out how to keep their house, car and utility payments going while paying off credit cards. “If people can come to credit counseling early in that process, there are more options at their disposal.”

How Can I Find a Credit Counselor?

Looking for referrals from friends and family is one way to start a search for a credit counseling agency. Also, check with your financial institution, university or a local consumer protection agency.

The credit counseling agency should be certified by the NFCC, which offers a website and toll-free number to help you find its certified members. The NFCC’s referral service will direct you to agencies that cover your area, which could be a local firm or a national one that is licensed in multiple states.

“We try to meet people wherever they are and make it as easy for them to plug in [to a credit counseling service] as possible,” Klipa says.

Once you’ve found a few agencies you like, review their background with your state’s attorney general’s office and local consumer protection agencies to see if there have been any complaints against them. It helps to also look at the Better Business Bureau’s website, which provides ratings of agencies up to A+. You can also find prebankruptcy credit counseling agencies through the United States Trustee Program.

Before hiring a counselor, ask a few questions:

— What services do you offer and are you licensed to provide them in my state?

— Can you help me develop a long-term financial plan?

— What are your fees and what if I can’t afford them?

Approach your search for a counselor like you would an attorney, accountant or other similar professional, Sullivan says. “A good counselor is happy to give you time to review materials, including agreements, and should not rush you,” he says. “There must be time for your questions and the counselor should have the answers. The counselor should be able to tell you if he or she is certified and verify that the agency is accredited.”

What Initial Steps Do Credit Counselors Take?

Once you’ve settled on an agency and set an appointment with a counselor, figure out the type of information you’ll need for your initial meeting. The better prepared you are, the more likely the meeting will go smoothly.

[Read: The Best Low-Interest Credit Cards of 2018.]

Although in-person meetings are ideal for some, they’re not always possible. As a result, most are handled by phone, and some take place online, Klipa says.

During a first meeting, counselors will likely review pay stubs to establish income, as well as expenses such as rent, car payments and cable bills. Sullivan says they will create a profile including assets, a budget and a list of debts.

“After the assessment, the counselor can then point out issues,” Sullivan says. Issues identified may include overspending or inadequate savings for emergencies or retirement. With an understanding of your financial situation, the counselor will help you create a new budget that includes debt repayment and savings.

What Is a Debt Management Plan?

If you are unable to repay your debts on your own, your counselor will suggest a debt management plan, also known as a DMP. This plan is determined after a thorough review of your assets, income and debt. In your debt management plan, the counselor will come up with the amount of money that’s available to you on a monthly basis.

“That will serve as the baseline for someone to begin to get out of debt,” Klipa says. “Typically, the credit card companies will look at this.”

To get to that number, you might need to do some belt-tightening, such as cutting back on cable channels or eating out less. Doing so helps build your case with creditors to show that “everything has been done that could be done to curb that expense load,” Klipa says.

If the debt management plan is accepted by your creditors, you will provide money each month to the credit agency, which then pays your unsecured debts, such as credit card and medical bills. The strong relationships between creditors and agencies allow agencies to be reputable negotiators on your behalf.

“Banks interface with agencies and counselors every day,” Klipa says. “They’ll have their own brand of oversight that occurs.”

A debt management plan can take between 30 and 60 months to pay off, according to the NFCC, but that’s not necessarily a bad thing.

“Consumers on a DMP can see interest rates fall by 15 or 20 percent,” Sullivan says. They might get relief from late payments and fees, and “can avoid bankruptcy and the credit destruction that comes with debt settlement and default.”

[Read: The Best Unsecured Credit Cards for Fair Credit of 2018.]

As an extra precaution, keep in touch with your creditors to make sure they accepted the plan and that the payments are on time each month.

How Much Does Credit Counseling Cost?

The costs for credit counseling vary from state to state, but the majority of services are offered at no to low cost, according to the NFCC.

There are charges for a debt management plan, depending on what eventually will be paid back. In addition to a small set-up fee, you may need to pay a fee of $25 to $60 per month, according to experts.

What Are Some Alternatives to Credit Counseling?

One of the primary alternatives to counseling is to work with creditors on your own. You don’t have to involve a third party to negotiate debts. However, credit counselors may have a better idea of what you can expect from payment plans that will be acceptable to creditors.

Another common alternative is debt settlement, which is usually offered by for-profit companies. The companies offer to negotiate on your behalf to pay off a debt, but be aware that this is not the same as a debt management plan and the company might not pay off all your debts. Debt settlement can be risky to your credit and financial situation, and is generally a poor choice compared with credit counseling.

Also, it’s possible you won’t get any counseling with a debt settlement agreement, which could make it more likely you end up in the same situation again, Klipa says.

If you are able to qualify, a debt consolidation loan is another option.

If you opt to use a credit counselor and draw up a financial plan — whether a debt management plan or not — personal discipline is the key to long-term success.

“Credit counseling can’t do miracles,” Klipa says. “But there are a lot of people who benefit from it. Hundreds of thousands are being helped each year, whether they’re on a DMP or just get basic counseling.”

More from U.S. News

Should You Apply for Multiple Credit Cards at Once?

6 Easy Steps to Take After Maxing Out Your Credit Card

How Long Do My Mistakes Stay on My Credit Report?

Everything You Need to Know About Credit Counselors originally appeared on usnews.com