What is credit counseling? Your Guide to Understanding Loan Advice

Free individual financial advice – without obligations and “without pitfalls”, according to one expert.

It’s not too good to be true. In light of the COVID-19 pandemic, personal finance experts say credit counseling services can be a risk-free lifeline for all types of people. And many of the organizations that offer it are stepping up their public relations efforts.

“There are no pitfalls in receiving financial advice while you are in loan counseling,” said Jim Triggs, CEO of Money Management International, a nonprofit financial advisory firm. The use of this voluntary advisory service is between you and the credit advisory company, says Triggs, and does not result in any information being passed on to the credit reporting agencies without your consent.

Loan counseling is free or inexpensive and is typically offered by nonprofit organizations. Consolidated Credit, for example, recently announced the launch of its Shutdown Hotline, a free phone service that provides debt analysis and routing to COVID-19-specific resources. And the National Foundation for Credit Counseling (NFCC) also offers free credit counseling services to help people out in the face of the pandemic. The group is focused on helping people get “some air to breathe” for short-term relief, spokesman Bruce McClary recently told CNBC Select.

If you are interested in credit advice, we will explain to you how to choose qualified credit advice and what to expect. We also give valuable tips from industry experts on how to get the most out of credit advice.

What is credit counseling?

Credit counseling primarily takes an education-based approach to debt management. This is in stark contrast to services like debt settlement, where for-profit companies try to pay heavy fees to pay off debts on your behalf. The ultimate goal is to enable people to take control of their own financial health and, more importantly, make better decisions in the future.

“We lack the knowledge and training we all need to be able to manage our finances and be comfortable doing it,” said Anthony Carlton, independent financial advisor at LearnLux, a company that develops online financial literacy tools and information. “Money is the number one source of stress for Americans, and there has to be a big change in the way we teach people how to manage money effectively.” For Carlton, the solution is clear: wider access to financial advice.

A common misconception is that you must be in debt to benefit from credit counseling. This couldn’t be further from the truth. “Everyone has the opportunity to benefit from a credit counseling session with a certified credit counselor,” said Chase Peckham, director of community outreach at the San Diego Financial Literacy Center and host of the personal finance podcast, Talk Wealth To Me. “A certified credit counselor will go over your budget with you to find out what areas your spending may be higher than you thought and discuss some savings tips and debt settlement suggestions, if applicable.”

Whether you need a debt management plan or just want advice on how to better manage your finances, credit counseling is always good. But those who have high debts or are several months in arrears will benefit most from this service.

According to the Federal Reserve Bank of New York, 4.7% of all consumer debt balances were at least 30 days late as of the end of 2019; of these balances, almost two thirds were more than 90 days late. The study found that nearly 9% of credit card debt was at least 90 days behind schedule.

It’s no surprise, then, that the majority of people who use credit counseling are struggling with credit card debt, according to Peckham. For those with large credit card debt, credit counseling can offer a range of solutions, from expert advice to debt management plans.

How to choose a credit advisor

When choosing a credit counseling agency, accreditation is crucial. Anthony Carlton can think of two names: the National Foundation for Credit Counseling and the Financial Counseling Association of America. “These two nonprofits are also the two largest independent certifiers of credit advisors. When looking for a reputable credit advisor, look out for the initials NFCC and FCAA, ”advises Carlton.

It’s also important to note that some credit counseling agencies specialize in certain types of debt. “At DebtWave, for example, we specialize in helping consumers pay off credit card debt,” says Chase Peckham. “For those consumers who also have student loan or auto payment debt they are struggling with, our team can provide resources and advice, but we cannot help but point them in the right direction.” With that in mind, take a look at what types of debt you are struggling with the most and try to find a credit counseling agency with particular expertise in these areas.

Pro tip

The relationship is a one-way street. You will only get what you put into a credit counseling and that means that you have to be honest and honest with your advisor.

Alternatives to credit advice

While credit advice is a logical first step for many debt settlement options, there are alternatives that can be pursued alongside financial advice. One option is debt settlement, a service offered by companies (usually for profit) that will try to pay off your debts for a lesser amount for a fee. However, the debt settlement process, which can often take years and can seriously affect your finances and creditworthiness, is not guaranteed.

Debt consolidation loans are another option. This could be a good solution when you have several high interest loans with significant monthly interest payments that prevent you from making any progress in paying back the principal. These loans take out a single low-interest loan to pay off and close out your existing high-interest loan. As with any type of loan, those with better credit scores get cheaper interest rates; Individuals with lower credit scores may need to secure the loan with collateral, which creates additional risks.

After all, for some people with particularly high debt-to-income ratios, filing for bankruptcy is sometimes the best way out. Note that credit advice is a prerequisite for filing for bankruptcy. The US Department of Justice maintains a list of nonprofit credit counseling agencies approved to provide pre-bankruptcy advice.

When deciding on a debt management plan with a credit counseling service, make sure that that isn’t the only thing you are getting out of the relationship. Good credit counseling will provide ongoing support and training throughout your DMP so that you can learn to better manage your finances in the future. If the agency can’t commit to that level of support, it is time to start looking for other credit counselors.

“Credit counseling can provide clarity and guidance when faced with financial challenges, but we are limited if our clients fail to reveal important details or wait too long to contact us,” says Jim Triggs. “It requires a willingness to organize yourself better and to work hard towards your goal.”