What does a Credit Counseling Agency do?
Credit Counseling Agencies (CCA) provide education and assistance to consumers who have more debt than they feel they can repay on their own. CCAs negotiate concessions from creditors to reduce or eliminate interest charges and stop late and over-limit fees. If they are nonprofit (most are), they will also provide free educational materials and/or courses on basic money management.
Who should consider seeing a Credit Counselor?
Credit counseling is appropriate for individuals who are trying to pay off their debt Dollar-for-Dollar but who don’t feel they are making any headway on their own. They may also be individuals who have high-interest rates on their credit cards, who may have taken out a payday loan, and/or who may be late on any such debts. Credit counselors may not be able to help you with the renegotiation of a mortgage, car loan, or other secured debt. For help with your mortgage, see a HUD-certified counselor.
What are the cost and fees involved in Credit Counseling?
There is no fee for meeting with a credit counselor to discuss your situation. Fees are generally only charged if you sign up on what is commonly referred to as a Debt Management Program (DMP). When enrolled in a DMP, your debt payments are consolidated into one monthly payment to the credit counseling agency who then distributes them to your various creditors on your behalf. There is usually an initial DMP Enrollment fee (typically $75 or less) and monthly administrative fees (generally capped at $50 or so). These may be flat fees, but they are more often based on a percentage of your monthly debt payment to your creditors or the number of creditors you place on the program. Just make sure that you get a written contract and that it specifies all of your financial obligations.
Does meeting with a Credit Counselor impact my credit score?
No. Credit counselors do not report your visits or counseling sessions to any credit bureau. Only if you sign up for a Debt Management Program through the credit counselor is there any notation at all on your credit report. See the next question.
How does participating in a Credit Counseling program impact my credit score?
Fair Isaac Company, the pioneer in credit score modeling and still the overwhelmingly most commonly-used credit score, clearly states that they do not take participation in a credit counselor’s debt management program into account when calculating an individual’s credit score. It should be noted, though, that any of the following may occur:
- Creditors may place a temporary notation on the individual’s report stating that they are enrolled in a DMP. This is done for the purpose of preventing any further credit card accounts from being opened while the individual is paying off current debt. The creditor is obligated to remove the notation once the individual is no longer enrolled in the DMP.
- When an individual enrolls in a DMP, their accounts are effectively closed (either by the individual or by the creditor) and converted into monthly installment accounts by the creditor. Because of how a credit score is calculated and depending upon the balance on the individual’s account(s), such closings may initially lower the individual’s credit score. However, FICO’s credit scoring model relies most heavily upon a history of on-time payments and lower balances, which is also what we strive to help our clients achieve.
How long does it take to pay off debt through a DMP?
DMPs, by regulation, cannot project debt repayment past 5 years. Most DMP clients who complete the program pay off their debt within three to five years.
How much debt does an individual have to have to participate in a DMP?
Most legitimate credit counselors do not set limits on how little or how much debt clients must have to enroll in their Debt Management Program.
What are the steps to signing up on a DMP?
First, an individual contacts the Credit Counseling Agency and goes through a no-obligation credit counseling session to determine if the individual is in position to repay creditors on their own, through a DMP, or if it might be more appropriate to refer them to a bankruptcy attorney.
The individual and the counselor look over the household budget and the circumstances of the individual’s debt. If the counselor and the individual agree that enrolling in a DMP will be beneficial, then the individual completes the enrollment agreement, pays the enrollment fee, and signs up for automated monthly payments through their checking account.
After that, it is the individual’s responsibility to ensure there are sufficient funds to cover the set monthly payment. It is the Credit Counseling Agency’s responsibility to work with the creditors on the proposed program, draw the funds, disperse them to the creditors within just a few days, and provide superior customer service.
Rather than signing up for a DMP, shouldn’t I just use the equity in my home to pay off my credit card debt?
As we’ve seen in recent years, a falling real estate market can present various financial dangers to homeowners in general. It may also completely erase the equity the owner has in the home. Still, as lenders are quick to point out, there are some tax advantages to using a home equity loan or line of credit to pay off high-interest credit card balances.
However, what such lenders usually ignore or fail to mention is that in about 70% of all such cases, the borrower will, within just one to two years, use those same paid off credit cards to build their debt back up to their original balances… at the same time that they will have a home equity payment due each month. Failing to pay a home equity loan may very well lead to foreclosure.
What happens if I start a DMP and have to quit mid-program?
Because of certain regulatory issues, creditors may not be able to offer the individual more DMP concessions within the next five years. Or, they may return the individual’s credit card accounts to their previous interest rates. There are no penalties charged by the Credit Counseling Agency.
Do Credit Counseling Agencies offer any other services to assist individuals?
Nonprofit Credit Counseling Agencies provide financial education program and materials to their clients and, if they are genuine, to the general public. Many of these programs are free and available via the Internet. Others, such as seminars, may charge a reasonable fee.
If I participate in a DMP, can I still get a mortgage, car loan, or credit cards while on the program?
While policies governing such loans vary from lender to lender, it is still possible to qualify for a mortgage while on a Debt Management Program. The same can be said of car loans. However, a letter from the Credit Counseling Agency stating that you have made a certain number of on-time monthly payments is often required by the new lender. It should be the individual’s and the Credit Counseling Agency’s goal to avoid ALL credit card and other unsecured debts while on the DMP. Consequently, the individual is unlikely to qualify for credit cards while on the DMP.