Today, we want to clear up some confusion surrounding credit counseling and its fee structure. In other words, we want to clear the air about how much it costs. We recently wrote an article about who needs credit counseling, where we helped explain why some people avoid credit counseling when really it’s designed to be an inclusive service. Hopefully we cleared up some confusion there, but there is still work to be done. Let’s dive into the fee issues in more detail.
Confusion between Credit Counseling and Debt Management
What we want to emphasize above all else is that credit counseling and debt management programs do not always go hand in hand. This is the most important part of understanding why credit counseling is free and why you should never pay for credit counseling.
“Credit Counseling” has, apparently, come to mean two different things. The first definition is that credit counseling is an umbrella term for multiple services offered by an agency. If we adopt this definition, then debt management programs, student loan counseling, and maybe even housing counseling programs too, would all fall under “credit counseling.” While we understand why this is happening, we aren’t quite sure it’s the best approach.
The reason is that there is actually a specific service called “budget and credit counseling,” and it’s the most basic yet important service we offer. It’s a preliminary session with a credit counselor that allows the client and counselor to do a full review of the client’s financial situation. This involves an analysis of how much money is going in and out each month (calculating a total deficit or surplus), discussing ideas to reduce costs or increase income, and reviewing payment history to creditors, along with interest rates and other terms.
For many of our clients, this is an invaluable service. Particularly for those who have not looked at their finances in this way before, organizing the information and being able to discuss the details with a financial professional immediately brings forth a new perspective. Of course, for those who are financially-savvy already and have already been budgeting and taking a critical look at their finances, this step may have slightly less value. But there’s more.
Credit Counseling as a First Step
We have said that credit counseling and debt management are two different services. And they are, without a doubt. But it might be helpful to think of the budget and credit counseling session as a stepping stone to a debt management program. After a counselor reviews your big-picture financial situation, he or she will then help you make a gameplan to address your debts.
Depending on the type of debt you have and which creditors you have accounts with, the outcome of this session may vary. If crippling interest rates are part of your financial struggle, a DMP could be the next logical step. Your counselor can explain which of your creditors are willing to make concessions, including offering a lower interest rate during your repayment.
This is a particularly unique benefit of credit counseling because it’s one that you might not be able to acquire on your own. Even if you are a chronic budgeter and are good with numbers, interest rates show no mercy. Of course, you can negotiate interest rates on your own in some cases, but the results will likely not be as positive as if you go through a credit counseling agency that has years of experience mediating on your behalf.
You Should Never Pay for Credit Counseling
And of course, there is no pressure to take what the counselor is offering. Just because your credit account qualifies for concessions or other arrangements deosn’t mean you have to take them. And you might not be a good candidate for the DMP, anyway. Many of our budget and credit counseling sessions end with a counselor making suggestions about ways to cut costs or “self-pay” debts, such as with the debt snowball. In other cases (unfortunately), clients don’t have enough of a cushion at the end of the month, even after making budget changes, for a DMP to be feasible. They may need to pursue other options, such as bankruptcy. What’s great, though, is how much information and insight you can get about the options that are available to you. All without paying a dime.
We hope we have helped explain the benefits of the credit counseling session. Be sure to check out our guide on how to choose a credit counseling agency, because all are not created equal. In fact, they don’t all offer “free” credit counseling. Even some organizations who are labeled “non profit” will charge for the services we have outlined here. The good news is that all agencies certified by the National Foundation for Credit Counseling (NFCC) do offer free credit counseling sessions, so be sure to make sure the agency you choose is NFCC-accredited. With this knowledge in hand, you should never have to pay for a budget and credit counseling session!