When Credit Counseling is Worth it

Credit counseling can sound like it’s a great bargain, as you receive a free examination of your finances and only have to deal with one payment per month in order to have a credit counselor make payments to all your other accounts and perhaps lower your overall debt on your credit cards. This may sound great; however you should know a few things about credit counseling before your jump the gun.

Mainly Funded by Credit Card Lenders

This may sound odd, as credit card lenders are the exact companies that you need help handling. However, credit card companies want to get their payments and so have a large incentive to get you to pay off your principal, even if they earn a smaller interest or even no interest at all doing it. In their eyes, it is much better to get paid something than have you walk away from your credit card payments.

How Counselors Make Their Money

Keep in mind that credit counselors do not make a profit by providing you with a free consultation. However, they do make a pretty penny by getting you to enroll into a debt payment program. In general you will find yourself paying anywhere from $20 to 50 each month and the lender will usually pay between 5 to 10% of all the balances they collect. Due to this, credit counselors have a huge incentive to try to get you to enroll in their plan regardless of whether or not you actually need it. Because of this, if a credit counselor says that you need their plan, think about getting a second opinion before you dive right in.

Conditions to Enrolling

There are some conditions to applying for a debt management plan. This includes the fact that a credit counselor will need to do a budget analysis before enrolling you in a plan in order to determine whether or not you will be able to continue to make a lump sum payment to them. They will also determine your chances of going bankrupt unless your payments are cut down.

Lowered Interest Rates

The arguably best thing about getting a credit counselor is that your interest rate will be lowered from anywhere between 0 to 5% and it could even lower your entire payments by 10 to 40%

Your Credit Report

Getting a credit counselor and entering into a debt management plan will in fact be reported on your credit report. The good news however, is that it will not affect your credit score in anyway.

Credit Cards

Enrolling into a Debt Management Plan will convert all of your credit card debt into a fixed loan. This means that you won’t be able to charge anything on them anymore. It is also usually required that you do not open up any new lines of credit while you are going through credit counseling.