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How credit counseling works and when you could benefit from it

Credit counseling can help with debt payoff and management. CNBC Select explains how credit counseling works and whether it's time to find a credit counselor near you.

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Whether you're trying to rebuild your credit score or you want to tackle debt that has been building up for years, credit counseling provides objective advice and resources to help you get your finances back on track.

Credit counseling organizations offer a range of services, classes and programs around topics like bankruptcy, credit card debt, mortgages and reverse mortgages, foreclosure prevention, student loans and small business loans all at low or no cost.

Below, CNBC Select explains how credit counseling works and how to find a credit counselor to help you repair your finances.

What is credit counseling

  • How credit counseling works
  • Who needs credit counseling
  • Where to find a free credit counselor

How credit counseling works

While there are a lot of programs out there, you want to find a nonprofit organization staffed by credentialed financial experts who specialize in debt payoff and debt management. You can start by checking out the National Federation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA). Both provide directories of their accredited member locations.

You can expect your credit counseling session to last about an hour, and they can take place online, in person or over the phone. Typically, you meet with a counselor one-on-one, but they may refer you to additional services, including free or low-cost classes on specific topics that are led by their counseling staff.

When you meet with the credit counselor, you and the counselor will take an in-depth look at your finances, starting with the big picture (reviewing expenses like rent/mortgage and car payments, as well as looking at total assets and total debts), then honing in on the specifics (like the APRs and late fees on each of your credit cards). For this process, you may need to authorize a credit check so that the counselor can see your credit report. Or if you have an up-to-date version of your credit report, you can take it with you to the appointment.

After your conversation, the credit counselor will make recommendations on steps you can take to improve your financial situation. They might recommend you enroll in a debt management program, where the credit counseling organization would negotiate a payment plan with your issuers on your behalf. 

Who needs credit counseling

You may need credit counseling if you feel overwhelmed or anxious about your being able to pay off your debt. If you are having trouble meeting your financial obligations, you may benefit from counseling. Credit creep is a common problem, and it doesn't take long for your debt to feel out of hand. You also may benefit from credit counseling if you plan on starting a business or taking on a mortgage, or if you've just navigated an unexpected life event that impacted your finances, such as a job loss.

Typically, people turn to a credit counselor when they need to know how to pay off their debt faster, consolidate their debt into one monthly payment, eliminate or recover late fees, negotiate lower interest rates and generally improve their money habits so they can work toward a better financial future.

Where to find a free credit counselor

The most reputable credit counseling organizations are nonprofits, and you can take advantage of their programs free of charge or at an affordable fixed rate. You won't pay high fees to meet with one, like you might with a financial advisor. 

To get started, search for an accredited credit counseling organization in your area on the FCAA website or by phone at (800) 450-1794.

You can also search on the NFCC website (search by zip code at the bottom), or call at (800) 388-2227.

Here are some ways to know you've found a safe and reputable credit counseling organization:

  1. You can access free information. This includes pamphlets, articles and e-books about the organization, its services and methodology, plus general financial information. You shouldn't have to share sensitive personal information first.
  2. It offers a range of services. This includes budget counseling and classes, small business loan education, bankruptcy counseling, foreclosure prevention, credit card classes and more. Beware organizations that push debt management programs upfront as the only option, as they hit you up with costly monthly service fees.
  3. You're offered a free consultation. Before you enroll in any kind of long-term settlement program, you should have an appointment with a counselor for an in-depth review of your finances.
  4. The fees (if any) are manageable. States often have laws regulating debt counseling fees, and they are typically no more than $50 per consultation. If you enroll in a debt management program, monthly maintenance fees should be no more than around $40 or $50. Unlike financial advisors who earn a percentage of your investments, credit counselors should not make more money based on how much your financial situation improves. Any fee that resembles commission or sales incentive is a red flag.
  5. It is accredited organization and the staff possess appropriate professional certifications, too. Be sure to inquire about this. Most importantly, you should check to make sure the organization is an NFCC or FCAA member. It's also best when the counselors on staff have financial credentials, such as a Certified Financial Planner (CFP) license, Certified Public Accountant (CPA) license, Chartered Financial Analyst (CFA) license or Certified Credit Counselor (CCC) license. If you're seeking counseling for buying a home, make sure your counselor has a specialization or license in real estate, and inquire whether the organization is approved by the U.S. Department of Housing and Urban Development (HUD) to provide mortgage advice. If your counselor or coach doesn't possess these credentials, ask what experience they have to make them qualified to help you.

Once you've gathered a list of credible organizations you want to reach out to, make sure they are legitimate by checking them out with your state attorney general and state consumer protection agency. You can also read your state's financial regulation laws, including consumer protection acts, to know your rights and learn more about the fee limits in your state. This information is usually found on the website for your state's financial commissioner or office of financial services.

Bottom line

Credit counselors can help you understand your financial options when debt becomes overwhelming, and in some cases they can even help prevent foreclosure or bankruptcy. Credit counseling is also helpful for major life transitions that require borrowing, such as home-buying or opening a business, or if you've recently experienced a financial emergency and you can no longer pay off your debt.

Most of the time, debt counselors and credit counselors are free and offer a wide array of resources including debt management programs. 

Once you get your debt under control, credit counselors can put you on track to pay off your debt, build your savings and begin to make a plan for your future. 

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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