Guide to Credit Counseling: 7 Key Questions to Ask

It’s no secret that financial education is sorely lacking in the U.S. However, this does not mean that you can’t seek financial education from reputable sources. If you have little to no knowledge on the topic of personal finance and are struggling with your finances, then you may consider credit counseling.

Credit counseling can involve a variety of services including educational materials and real-world application to your finances. Credit counselors can help you to set a budget and advise you on how to manage debt and your money in general.

According to the Federal Trade Commission (FTC), reputable credit counseling organizations have certified counselors who are trained in consumer credit, money and debt management, and budgeting. Credit counselors will work with you to come up with an individualized plan to address the money issues you are facing.

Seeking credit counseling is typically voluntary but can be required when filing for bankruptcy. In this guide, we’ll answer some key questions you might have about credit counseling and whether it’s right for you.

How Do You Find a Credit Counselor?

Before settling on a credit counseling organization, do your homework to make sure they are not only reputable but will also be the most helpful for your particular financial circumstances. Check with your state’s attorney general and the consumer protection agency present in your state to see if there have been any complaints filed.

When looking for a good credit counseling agency, first ask about what information or educational materials they provide for free. Organizations that charge for information are typically more interested in their bottom line than helping you. Also, ask about the types of services they offer. Limited services can be a red flag. The fewer services they offer, the fewer solutions they may provide you.

You do not want to be pushed into a debt management plan simply because that is their top service. And make sure you understand the organization’s fee system, not only how much services will cost but also how employees are paid. If employees make more based on the number of services you receive, look for another credit counseling organization.

MagnifyMoney has come up with a list of some of the best credit counseling options, which are a great place to start. If you are looking for credit counseling as a pre-bankruptcy measure, the U.S. Trustee Program has a list of approved credit counseling agencies that can provide pre-bankruptcy counseling.

How Much Does Credit Counseling Cost?

Credit counseling can involve both start-up and monthly maintenance costs. The Department of Justice has said that $50 per month is a reasonable fee. Further, the National Foundation for Credit Counseling (NFCC) has suggested that a start-up fee should not exceed $75 and monthly maintenance fees should not be more than $50 per month.

Credit counseling agencies may offer fee waivers or fee reductions, depending on your income levels. Where credit counseling is required, the DOJ requires that if the household income is less than 150% of the poverty line, then the client is entitled to a fee waiver or reduction. While the poverty line varies depending on household size, it ranges from $11,880 for a single person family household to $24,300 for a family of four.

Other regulations, such as when fees can be collected and circumstances that would warrant fee reduction or waiver, may also be set forth by your state.

How Long Does Credit Counseling Last?

While the length of your credit counseling session depends on the complexity of your financial problems, sessions typically last 60 minutes. After the initial session, credit counselors will then follow up to ensure you understand the actions you needed to take and that you have been able to get started on the plan they developed. Another session may be necessary if you see a significant change to your financial situation.

What Do You Accomplish with Credit Counseling?

According to the NFCC, reputable counseling involves three things. First, a review of a client’s current financial situation. You cannot move forward unless you know where you are starting. Second, an analysis of the factors that contributed to the financial situation. You don’t want bad habits to undermine your progress. Lastly, a plan to address the situation without incurring negative amortization of debt. This gives you a place to start in improving your financial situation.

What Is the Difference Between Credit Counseling and Debt Management Programs?

A debt management plan is just one solution a credit counselor may recommend based on your financial situation. Having a debt management plan is not the same as credit counseling.

A debt management plan involves the credit counseling organization acting as an intermediary between you and your creditors. Each month you will deposit an agreed upon amount of money to your credit counseling agency, which will, in turn, apply it to your debts. The credit counseling agency works with your creditors to determine how the amount will be applied each month as well as negotiates interest rates and any fee waivers. It’s important to call your creditors directly to check whether they are open to negotiating interest rates or offering waivers for fees. In some cases, a credit counseling firm may promise to negotiate those things for you but be stonewalled when they discover a creditor isn’t even open to the discussion.

Before agreeing to a debt management plan, make sure you understand any fees associated with the debt management plan and any choices you might be giving up. For example, some debt management plans may have you agree to give up opening up new lines of credit for a specified period of time. Remember that a debt management plan is just one of many solutions a credit counselor may advise you to consider.

How Does Credit Counseling Impact Your Credit Score?

Not directly. While the fact you are in credit counseling may show up on a credit report, that fact does not affect your score. The actions you take as a result of credit counseling can impact your score. For example, if you don’t choose a reputable credit counseling agency, the agency may submit the payment on your behalf late to your creditors, which can damage your credit score. So even though you submitted your payment on time to the credit counseling agency, it is possible that the credit counseling agency will issue a late payment on your behalf. This is why it is important to make sure you use a reputable credit counseling agency.

Who Should Consider Credit Counseling and When?

While credit counseling is sometimes required, like in instances of bankruptcy, you always have an ability to seek credit counseling. Bankruptcy attorney Julie Franklin, based in Boston, Mass., explains, “For bankruptcy purposes, there are two course requirements — a debtor must complete the first credit counseling course prior to filing and obtain a certificate that is filed with the court in their initial bankruptcy petition documents. Post bankruptcy filing, the debtor is required to take a second course, and upon completion, the certificate that is issued must be filed with the court in order for the debtor to obtain an order of discharge.”

Anyone struggling with personal finance should consider credit counseling as a viable option so long as they use a reputable credit counseling agency. Franklin also notes that “the first credit counseling course is a tool for debtors as it compels the individual taking the course to closely examine the household assets, income, liabilities, and spending habits to determine if there’s a way to ‘save’ the debtor from having to file bankruptcy.” If you are considering bankruptcy, you will have to attend some credit counseling anyway, but it could also help you to avoid filing for bankruptcy.

Voluntary credit counseling might not help if you are already being sued to have a debt collected. However, you may be able to negotiate terms with the debt collector that result in a withdrawal of the suit if you agree to enroll in credit counseling and possibly a debt management program. Not all creditors will agree to such terms, but it is possible.

The post Guide to Credit Counseling: 7 Key Questions to Ask appeared first on MagnifyMoney.

What You Need to Know About No-Interest Credit Card Offers

NoInterestA credit card with a no-interest offer might sound like the perfect opportunity to buy something big, transfer a balance, or get that new piece of furniture you’ve had your eye on. But if you sign up for one of these cards without fully understanding its terms, you may wind up paying interest on each of your purchases.

The fine print on these credit cards can include important notices about dates and changes to the terms of your introductory or offer period, which could be very relevant to your spending patterns. Here are some details you should be aware of when considering a no-interest credit card offer:

No-Interest May Be Deferred Interest

Retailers often offer these cards during busy shopping times, with terms including no interest on purchases for the first 12 or 18 months for new customers. Some cards may help you save big on major purchases by extending your payments for months without interest.

But according to Kathryn Crumpton of the Center for Financial Wellness, a consumer credit counseling service, once the introductory period ends, “sometimes they will go back to the beginning and charge interest.”

If you don’t pay the full balance before the introductory period ends, you may be required to pay interest on each of your purchases, even if you’ve nearly paid the full balance. The interest rate may also be much higher than you expect, sometimes as high as the penalty rate for some regular credit cards.

“If you plan to carry a balance, that interest rate becomes paramount,” says Crumpton.

Missed Payment Penalties

Missing a payment on your credit card may also affect your financial health, with penalty fees incurred, higher interest rates assessed, and the potential to negatively impact your credit score.

“If you miss a payment, it will probably increase your payments,” says Crumpton. Though actual details will vary depending on your card’s terms of service, you should always look through your contract and be sure you understand when and why fees may be applied.

Besides adding extra fees, missing a payment may add to the debt you already owe. If you are working to pay the balance on a no-interest card, missing a payment or even charging additional purchases to take advantage of the no-interest deal could result in your being unable to pay the remaining balance later, potentially leaving you responsible for the full amount of interest accrued during the card’s introductory period.

“A good rule of thumb is, don’t charge more than what you can comfortably pay off in a couple of months,” says Crumpton.

Money Management

The attraction of a no-interest card might make it hard to resist. Many consumers sign up for cards impulsively, often not fully considering their financial implications–or obligations. How you manage your expenses, including credit cards, is important to your overall financial health.

“Money management is a skill, and you have to learn it and practice it to be good at it,” says Crumpton. If you don’t currently feel in control of your finances, a new credit card may not be the solution you need.

You can begin educating yourself by reviewing your next credit card statement and reading the fine print, looking carefully for details about how and when to make payments. The statement and terms should explain the length of time pay your balance entirely with minimum payments, as well as note the date when the no-interest period will expire.

Taking the time to review a no-interest credit card offer, as well as your own finances, can help ensure that what looks like a good deal doesn’t end up costing you any extra interest.