How to decide whether you should work with a credit counselor

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If your credit report is neat and tidy and you’ve got a healthy credit score to back up any application you happen to make for new credit, that’s great. But, if you’re like the estimated 30 percent of Americans who have bad or poor credit, you’ve got a problem.

Luckily, it’s a problem with a solution, and right now is a great time to focus your energy on getting into financial shape. One good way to start: engaging the services of an accredited credit counselor. Here’s how to do that, and what you should expect.

What’s in your credit score?

What goes into a credit score, anyway? The three major consumer reporting agencies (Equifax, Experian, and TransUnion) consider dozens of factors, but those can be reduced down to five categories, according to Todd Christensen, education manager for Money Fit by DRS Inc., and the author of Everyday Money for Everyday People.

When it comes to figuring out your FICO score (one of the scores that is most commonly used by lenders), “it’s 35% payment history, 30% balance and usage, 15% age of accounts, 10% new accounts, and 10% credit mix,” he says. To keep your credit score up, “Make your payments on time as agreed, pay down your debts as much as possible every month, don’t close old accounts, don’t apply for a lot of new accounts in a short period, and use credit wisely.”

Suffice it to say those things are sometimes easier said than done.

Notice, though, that income is not a factor in your credit score. Even financially successful people can have bad credit.

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Why talking to a credit counselor might be right for you

If you find yourself with bad credit, or are struggling to manage your debt on your own, or simply need unbiased counseling on these matters, it might be time to see a counselor.

Services available typically include free personal and household budget counseling and coaching, free credit report analyses, free debt reduction strategy counseling, free checkbook balancing counseling and help, and free financial education program and webinars on a wide variety of personal finance topics.

Additionally, most credit counseling agencies offer capped fee-based services that include debt management (payment consolidation), student loan counseling, bankruptcy certificates, and housing counseling. Clearpoint, an agency accredited by the National Foundation for Credit Counseling, publishes a rate sheet that shows that budget and credit counseling are free, and debt management plans are capped at $50 per month.

How do I choose a credit counselor?

Some credit counselors are part of for-profit organizations. This could mean that your counselor’s incentives are not aligned with your own. The Consumer Financial Protection Bureau (CFPB) says that if a counselor gets paid more when you sign up or pay fees, that’s a red flag.

It’s a good idea to look for a non-profit counseling agency accredited by either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America. Not coincidentally, you can search either site for an accredited counselor near you.

From there, you’ll want to consider what kind of interactions you want to have. Is a phone consultation enough, or do you want to meet with someone in person? Different counselors will offer different levels of access.

And finally, some welcome news, especially given the circumstances: You can typically get your first counseling session for free. After that, cost will vary based on services and the aforementioned access—though as the NFCC notes, the majority of services are provided at “low or no cost.” (To see just one example, check out this list of fees from Clearpoint, an NFCC-member agency.)

What red flags should I watch out for?

Great question, my rhetorical friend. As with just about anything else financial, you should proceed with caution.

Some warning signs:

  • Any company that requires you to pay upfront, before helping you.
  • Any company that promises to remove negative information from your credit report (they can only promise to ask the creditor to remove the item)

For more red flags, particularly for companies offering credit repair, see the Consumer Finance Protection Bureau’s helpful article on exactly that.

What happens to debts?

Credit counseling is not debt settlement. A credit counselor will offer to help with debt management. “A debt management plan helps the consumer pay off 100% of their debt using monthly payments and lower interest rates from the creditor over the next three to five years,” Christensen says. Debt settlement, on the other hand, is very damaging to your credit. “Debt settlement attempts to negotiate a one-time balance payment of less than what is owed, typically around 50%,” Christensen says. “Debt settlement companies take a consumer’s monthly payment and hold it for a year or more until they have enough to negotiate a 50% payoff on the balance. This leads to significant negative effects on the consumer’s credit rating, since accounts remain unpaid for up to two or three years, and they show as settled accounts for another seven years.”

Finally, Christensen notes that legitimate credit counseling agencies do not use telemarketing or email solicitations. You are advised not to respond to either.

What happens at a counseling session?

First things first: Before your session, your counselor will likely advise you on what to prepare. This might include gathering up important documents like your most recent credit card statement, your last mortgage and/or car loan statement, any student loan documentation, collection notices, medical bills, and anything else that might apply to your situation. If you’ve been using a budgeting app, or even doing your own budgeting in a spreadsheet, bring that, too. The counselor can also, with your permission, pull your credit report (which, in this instance, will have no impact on your credit rating).

You should also be prepared to make some significant changes based on the advice of your counselor. It might be the only way to clean up your credit and avoid similar setbacks in the future.

One important note: Credit counseling is going to be free in most cases. You might pay $20-40 a month for other services, often on an income-based sliding scale.

What are the next steps?

That feeling in your shoulders? That’s what it’s like to have a giant weight lifted off of them. Or, at least, that’s the goal: To empower you to maintain excellent credit going forward, opening the doors to lower interest rates for financing on homes, cars and other loans. To put it another way: Improving your credit is a way of lowering the cost of borrowing money in the future.

How you get to that enlightened state will depend on the condition of your finances. Think of it like a nutritionist: The goal is to end bad habits and establish good ones, so you’ll be happier and healthier.

Brass tacks: Everyone worries about money from time to time, and it can be hard to get the right advice from someone in your inner circle. Money is emotional—it can be embarrassing to ask for help. (This is true even if you aren’t in debt. It’s hard to admit when you don’t know something.)

The new year is in full swing. Many of us made resolutions to be physically and spiritually healthier. A counseling session can be the first step in getting your fiscal health in order, too.

As for just plain getting in shape, you’re on your own…

Warning...

Peace of mind might be closer than you think.

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Money Fit is a non-profit financial wellness program of Debt Reduction Services, Inc., a full service debt management and credit counseling service organization accredited by the Financial Counseling Association of America. Haven Life Insurance Agency offers this as educational information only. Haven Life does not endorse or offer the companies, products, services and/or strategies discussed here, nor does Haven Life offer credit counseling or other financial advice.

Louis Wilson is a freelance writer whose work has appeared in a wide array of publications, both online and in print. He often writes about travel, sports, popular culture, men’s fashion and grooming, and more. He lives in Austin, Texas, where he has developed an unbridled passion for breakfast tacos, with his wife and two children. This article is sponsored by Haven Life Insurance Agency. Opinions are his own.

Haven Term is a Term Life Insurance Policy (ICC17DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In New York, Haven Term is DTC-NY 1017. Our Agency license number in California is OK71922 and in Arkansas, 100139527.

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