As of late 2017, the average American household carries over $137,000 in debt. With the median household income coming in at just $55,322, based on 2016 from the US Census Bureau, many families find themselves struggling to meet their obligations.
When debt becomes more than a household can manage, many seek help. Credit counseling can be a viable solution, but many people aren’t fully aware of what these services provide and whether there is a cost. What people really want to know is this; is credit counseling free?
Is Credit Counseling Free?
Credit counseling can be free, but that isn’t necessarily the standard. Often, the organization charges administrative fees, which can vary dramatically.
Basic credit counseling services, such as household income and budget reviews, are commonly available at no cost. These are educational in nature, giving you a chance to work with a credit counselor to gain knowledge and improve your situation. However, if you elect to use a debt management plan through the service, there can be a cost.
Typically, there is a small setup fee for a debt management plan along with a monthly cost for managing your account. However, the vast majority of reputable agencies keep their prices low. They understand that anyone using their services is struggling with debt, and they don’t want to add unnecessary hardship to a challenging situation.
Often, your setup will be around $50, and monthly fees will be a similar amount. However, some organizations have waivers, eliminating or lowering the cost for those who are in significant financial trouble and can’t afford the cost without harming their ability to survive. In those situations, free debt management plans are possible.
Selecting a Credit Counseling Agency
Credit counseling is available through both for-profit and not-for-profit organizations. You need to find a reputable agency before acquiring any services.Usually, shopping around is the best approach. Research organizations that serve your area to locate the right one for you.
As you start researching, focus on a few key questions. Is the credit counseling agency licensed by your state? Are they accredited? Are the counselors certified?
If you are having trouble choosing an organization, look for members of the National Foundation for Credit Counseling as they adhere to strict standards regarding performance, data security, counselor accreditation, and customer service.
In most cases, going with a non-profit is a better approach as their fees are usually lower. However, not all non-profits are reputable. You still need to make sure they are legitimate.
You can check the Better Business Bureau to learn more about the agency’s reputation. Numerous complaints with the BBB is a red flag. Similarly, our state attorney general’s office can be a good resource.
After you narrow down the list, consider contacting each organization and requesting free information. This can include brochures about their services and educational materials.
If you want to move forward, ask for a written contract. It should outline all costs, available services, and the amount of time the program requires. If they won’t provide details in writing, that is a warning sign of a less-than-reputable agency.
How Does Credit Counseling Work?
After you select an agency, you’ll have an initial session with a credit counselor. This could be a phone call or an in-person meeting. Typically, each appointment lasts at least 20 minutes and can go for up to an hour.
A review of your personal finances gives the counselor information about your situation. After they collect the details, they can help you craft a plan. In most cases, they will assist with creating a budget. They also give other financial recommendations that may improve your circumstances. Often, you’ll receive information about useful tools and additional resources along the way too.
If your situation is especially challenging, they may recommend a debt management plan. Usually, these involve securing lower interest rates on your debts and setting up a new payment schedule. While this can make your monthly payments more manageable, consider this a last resort.
When you enter into a debt management plan, a few things occur. First, having to close the account of any debt you include is common. Most lenders consider it a condition for offering you a lower interest rate. If you go forward, closing a revolving account, like a credit card, can harm your credit score.
Second, you will likely have to make your debt payments to the credit counseling agency, not your lenders. If the organization is reputable, this isn’t typically an issue. They will accept your payment and then divvy the money out to your lenders.
However, less scrupulous agencies may not meet their obligation. They could take your money and not pay your debts on time, or even at all.
Even if you use a debt management plan with an agency, you are still fully responsible for paying back the money. That means, if a credit counseling agency doesn’t send your payments, you are liable.
Other recommendations are also possible. If your debt is insurmountable, the agency may suggest you consider bankruptcy. However, this is extremely rare, as most of these organizations focus on helping you repay your obligations.
Are There Credit Counseling Scams?
To put it simply, yes, there are credit counseling scams. While there are numerous reputable organizations across the country, some people take advantage of those who are looking for help.
There are signs that an agency may actually be a scam. For example, demanding an upfront fee before providing any information or not giving you a written contract in advance are both red flags. Also, making promises that sound too good to be true, like claiming you can “easily” get out of debt, should serve as a warning.
Incredibly high fees are also a reason to be wary of the organization. Legitimate credit counseling agencies don’t want to harm your financial situation. If the cost is going to add to your debt load or make managing your debt payments nearly impossible, then seek out another organization.
Ultimately, credit counseling agencies can be a great resource. You can access free information and assistance to help you improve, and potentially access options that can make your debt more manageable.
However, you must be diligent when choosing a credit counseling agency. Scams do exist, and not all of the organizations are reputable. Take the time to do some research first and contact a few agencies to see which one is right for you. If you think an agency may be a scam, move on to another one. There are numerous reputable organizations out there, so there is no need to take an unnecessary risk by signing up with an agency that makes you uncomfortable.
Have you ever used a credit counseling agency? Tell us about your experience in the comments below.
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