Who Needs Credit Counseling?

Credit counseling can be a mysterious subject. It sometimes gets lost in the world of banking services, self-help financial apps, and other products and services, even those which are dangerous to consumers, like debt settlement. On the other hand, credit counseling is occasionally stigmatized as a resource reserved for those who can’t manage their money. In all this confusion, one important piece of information gets lost—Who needs credit counseling? What types of consumers is credit counseling designed to help? Why should these consumers take advantage of the service, and why is it better than the alternatives? Today, we are going to cover the reasons some people shy away from credit counseling and then we’ll talk about who, specifically, should consider using it on their path to an improved financial future.

Reasons for Avoiding Credit Counseling

There are a few reasons that consumers might avoid credit counseling agencies, even though their financial situations make them a good fit. Here are a few of the common reasons, along with points to show why credit counseling is still a good option.

People who Think Credit Counseling is a Scam

It’s understandable that people are suspicious of credit counseling. After all, money and our overall financial standing are things we should protect at all costs. But unfortunately, the reason for this fear has very little to do with legitimate credit counseling. Many of the horror stories about credit help gone wrong come from consumers who used credit counseling alternatives such as debt settlement, debt consolidation, or other forms of “credit repair.”

Typically, these are the sectors that make promises that are way too good to be true and encourage their clients to take actions that might actually be detrimental to their credit standing (such as avoiding payment in the case of debt settlement). What you have to remember is that credit counseling is different than these other businesses.

Credit counseling allows you to repay everything you owe, which can be favorable to your credit, and you can do so at terms that will allow you to save money over time. Even if you don’t opt for a debt management program, just seeking the advice of a certified credit counselor can jumpstart your journey to a healthier financial future.

Ensuring You Find a Legitimate Agency
But you should still be careful. There are agencies out there that claim to be non profit but are still in some ways “predatory,” and they might even charge you for the initial session. The best bet is to go with a NFCC-certified agency. Remember, budget and credit counseling should always be free, and you can use this guide to help identify a reliable agency.

The Do-It-Yourself Crowd

There is another mentality that keeps some people from seeking credit counseling. This is the DIY mentality. For some, the idea of getting help from someone else just isn’t bearable. And, they might even feel as though credit counseling isn’t worth paying any fees or that maybe it’s a little “suspicious” because it charges people for help.

There are a few things to clarify here. First of all, the initial credit counseling session should always be free, so fees don’t come into the picture unless the client enrolls their accounts in a debt management program or opts for another service offered by the agency.

Secondly, a good credit counseling agency will encourage a DIY approach. That’s right! If a credit counselor reviews your situation and determines that you have enough cushion each month to comfortably make your payments, he or she might recommend that you pay off the debt all by yourself, without using a professional service. This will involve using either the ladder method or the debt snowball.

And third, a debt management program can provide benefits that a consumer just can’t acquire on his or her own. So in that sense, the do-it-yourself type of person will still get an added benefit. We will cover this in more detail throughout the article.

Overcoming Guilt, Shame and Privacy Concerns

A Third reason that some people might not be comfortable with credit counseling is that they think it’s stigmatized or somehow a shameful thing to do. Maybe they worry that friends and family will make fun of them or, even worse, judge them for needing the help of an outside agency.

First of all, a good credit counseling agency will make your privacy one of their top concerns and will maintain confidentiality throughout your working relationship. As for friends and family, it’s up to the individual whether to share what they are going through. Just remember that it takes courage to ask for help and doing so is a much better long-term solution than avoiding help and digging yourself into a deeper hole.

And, believe it or not, credit counseling isn’t all that bad and stigmatized. Watch some of our client videos and you will learn more about how personal and rewarding the experience can be.

So Who Should Consider Credit Counseling?

So we’ve covered why people avoid credit counseling, but who needs it? Here are some categories you can use to determine whether credit counseling is a good idea for you.

Debt to Income Ratio

We’ve written extensively about debt to income ratios (DTIs) and what a good debt to income ratio looks like. But as a quick refresher, 15 percent and below is considered a safe level. Between 15 and 20 percent is considered to be a sign of trouble. And, 20 percent or above is considered to be a red flag and a sign of a dangerous situation.

If your debt to income ratio is above 15 percent, that’s a good indication that you could benefit from credit counseling. It doesn’t mean that you will necessarily need a debt management program, but without a doubt you could benefit from the free, unbiased advice of a credit counselor. You will likely learn ways to save more of your money and meet your financial obligations more comfortably.

Credit Counseling Checklist

Type of Financial Distress

Another good indication of whether you can benefit from credit counseling is the type of hardship you are experiencing. There are certain life events and financial situations that credit counseling agencies are accustomed to handling. Here are a few situations that could warrant a trip to a credit counseling agency:

  • reduced income
  • poor money management/excessive spending
  • increased expenses
  • unemployment
  • divorce or separation

Type of Debt

The type of debt you have might also affect how much a credit counseling agency will be able to help you. In particular, these agencies are poised to assist with credit card and medical debt.

It’s no surprise that credit counselors help with credit cards, but do you know the specifics? If you choose to enroll your credit accounts in a debt management program after your initial credit counseling session, you will learn about the real benefits credit counselors can help you secure. Essentially they mediate on your behalf and work out arrangements and concessions with your creditors. These can include waived fees and lower interest rates, which can provide significant relief to those who are struggling each month.

In terms of our clients, the average unsecured debt totals $16,834 and the average client has nine different creditors. Your numbers may be slightly more or less, but these are certainly a guideline for the types of situations that warrant a credit counseling session. Keep in mind too that these statistics are for Debt Management clients, and we counsel and help many more people who have less severe situations and are able to handle them on their own.

Credit Score Levels

Your credit score can determine whether you need credit counseling, too. We have to be careful here, because we aren’t implying that credit counseling always helps your credit score, especially not immediately. But typically, if you use a debt management program, you will be paying your accounts on time every month and that can have a positive effect.
What’s more important to understand is that consumers with low credit scores have fewer options. There are some debt management options out there, such as refinancing or using balance transfer that can provide creative ways to get lower interest rates and save thousands of dollars over the course of repayment. But these are reserved for consumers with good or excellent credit.

On the other hand, there is bankruptcy, which is typically chosen by consumers with bad credit who are in over their head. Bankruptcy should be a last resort because of the long-term damage it does to your credit, but unfortunately it is often chosen without considering the long-term effects. Credit counseling and a debt management program can be a good middle ground alternative for those who don’t qualify for the best options but want to avoid bankruptcy.

Credit Counseling Isn’t for Everyone

It’s true, credit counseling isn’t for everyone, but it’s a realistic option for more people than you may have realized. If you fit into a category that makes you a good candidate for credit counseling, consider contacting Clearpoint to enroll in a free budget and credit counseling session to get started.

Thomas Bright is a longstanding Clearpoint blogger and student loan repayment aficionado who hopes that his writing can simplify complex subjects. When he’s not writing, you’ll find him hiking, running or reading philosophy. You can follow him on Twitter.

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2 responses to “Who Needs Credit Counseling?”

  • Douglas Brown

    My credit score is high enough that I have not had to resort to counseling, but it is something that may be on the horizon none-the-less. You give good advice in cautioning those who do seek counseling that it may not produce results immediately. This is an important thing to remember, not just here, but anywhere that a process must take its time. Patience can go a long way, especially with credit, that can take time to rise again.

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