A lot of people who get into trouble with credit card debt become tempted by offers of debt management, debt negotiation and debt consolidation. It is important to note that credit counseling and debt management are NOT the same. There are companies that offer both; however, most debt management companies will charge for their services, as compared with non-profit and free credit counseling services.
In some cases, debt management companies will not do what they promise. They might not be able to negotiate good terms, or they might send in payments late, leaving you worse off than before. There is a role for debt management in helping people with their finances, but it is really a case of buyer beware and researching several companies to compare offerings and make sure you are clear about their commitments and yours.
What Is Credit Counseling?
Credit counseling is a financial service designed to educate consumers about how to pay off their debts, and stay out of debt. Credit counseling will usually involve the person who needs counseling gathering all their bills and credit card statements together so they can analyze their situation with the help of a counselor. In this way, they can come up with a structured plan to pay down their debt.
Counseling will also usually involve education about money management, such as budgeting and saving, so people can stay out of debt and even start to accumulate savings.
What Is Credit Counseling's Role in Debt Negotiation?
Credit counseling is different than debt settlement or debt negotiation services. Credit counseling is more about education and helping consumers find their best path out of debt through their own practical action steps.
By contrast, debt settlement and debt negotiation are typically offered by for-profit companies. They deal with the credit card companies, look at your budget, and come up with a monthly payment that will be applied to each of the debts you have listed in the debt management program.
The better companies can often get interest rate lowered significantly, for example from 29% down to 7%. Your cards will be frozen and you will not be able to use them. However, your account will remain open, which is good for your credit score because gradually your credit-to-debt ratio will improve and your account will continue to age and help boost your score as well.
These services usually charge a monthly fee, for example $50, but it can be well worth it if they are able to stop harassing phone calls and get you a better deal on your minimums to pay back.
During the course of your debt settlement program, the better companies will offer you credit counseling, give you access to a library of information, and more. The main thing to check is your statements every month to make sure your money is being paid in on time so no late fees are triggered and harm your credit score.
You will continue to get statements for each card while on the debt management program. Be sure to check them each month to ensure all is as it should be.
Can Credit Counseling Help Me Pay Down Credit Cards?
In some cases, a debt management company might reject you as a client because you are not carrying enough debt. This should tell you that their main interest is in making money.
By contrast, credit counseling can help you make a plan to pay it off over time regardless of the amount. They will review all of your options for dealing with credit card debt, discuss the advantages and disadvantages of each, and help you create a budget for yourself that will allow you to pay down your debt each month. You can even get scripts as to how to approach the credit card companies for a better deal. The worst they can say is no.
As you can see, while a good debt management company can still help you with specific debts, credit counseling looks more at “the whole picture”.