Credit counseling agencies do much more than simply negotiate repayment plans with your creditors. The most reputable agencies offer other services like financial education, budgeting counseling, credit counseling, bankruptcy education, debt management plans, and even mortgage and homebuyer counseling.

Before giving you a solution to your credit card debt, the credit counselor should talk with you about your finances including your income, expenses, and your credit card debt.

What is a Debt Management Plan?

If, after talking with your credit counselor, it’s decided that you need help paying your credit card debt, you will be enrolled in a debt management plan. A debt management plan or DMP is a payment schedule that allows you to repay your debt.

Before the start of your DMP, the credit counselor contacts your creditor to negotiate a reduction on your minimum payment and interest rate. Once your creditors agree to the DMP, you begin sending a single monthly payment to the credit counseling agency. The credit counselor divides your payments and sends them to your creditors.

It’s important that you continue sending your credit card payments directly to your card issuer until the credit counseling agency confirms that you’re enrolled in the DMP. Then, once you’re on the DMP, continue to check to make sure that your credit card issuer is receiving your credit card payments on time. Late and missed payments could result in you being dropped from the DMP. If that happens, your previous interest rate and minimum payment will be reinstated.

How Credit Counseling Affects Your Credit

Your credit report may be updated to reflect that you’re enrolled in a debt management plan. While the listing itself doesn’t hurt your credit score, it could be perceived as negative by lenders and other businesses that review your credit report. It indicates that you had financial trouble and didn’t pay your credit card bill as reviewed. Negative information only remains on your credit report for seven years. So, any negative information associated with credit counseling will not affect your credit standing forever. Ultimately, credit counseling is better than the alternatives of bankruptcy or not paying at all.

While you’re enrolled in a debt management plan, you won’t be able to use your credit cards. Some credit card issuers close the credit cards and others take away your available credit to keep you from making additional charges on your credit card. It’s better that you don’t take on new debt while you’re on a DMP because it will be harder to pay off your existing credit card debt.

How Much Does Credit Counseling Cost?

Fees for consumer credit counseling vary but are typically between $10 and $50 a month. Reputable credit counseling agencies should be able to waive the monthly fee if you are having extreme financial hardship and cannot afford to pay the monthly fee. The fee is added to your total monthly payment, including the amount you pay toward your credit card debt.

Avoid Credit Counseling Scams

Not every company who promises to help pay off your credit card debt is a reputable credit counseling agency. Some companies are, unfortunately, only trying to make money from you. When you’re shopping for a credit counseling agency, be on the lookout for scams.

Choose a company certified by a national agency. Look for a credit counseling agency that’s associated with one of the following agencies: The National Foundation for Credit Counseling (NFCC), the National Association of Certified Credit Counselors (NACCC), or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). All these associations allow you to search for a credit counseling agency through their websites.

Do not pay an upfront fee. The initial counseling session should be free. If a credit counseling agency asks you to pay upfront, do not pay anything, and find another company.

Check with the Better Business Bureau. The company should not have any unresolved disputes with the Better Business Bureau.

A credit counseling agency can’t change your credit report. A sure sign of a credit counseling scam is a company that promises to delete information from your credit report. Any company that says it will change your credit report is more likely a credit repair company, which should be avoided all together.

If a credit counseling agency takes advantage of you, you can report them to the national agency they’re affiliated with (the NFCC, NACCC, or the AICCCA), the Federal Trade Commission, and your state Attorney General.

Credit counseling agencies don’t have special abilities or relationships with credit card companies. You have the power make the same negotiations they do. But, you may choose a credit counseling agency if you don’t have the confidence to negotiate with your creditors or if you lack the discipline it takes to stick to a debt management plan.

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