Credit card counseling pros and cons

Feel like you don’t know how to keep your finances under control? You’re not alone. Nearly 43% of Americans failed a national financial literacy test. Meanwhile, millions across the country are in heavy credit card debt. Many don’t have any money saved for retirement. And many don’t know how to budget.

Wouldn’t it be great if there were organizations that could help you learn about your finances? Actually, there are. They’re called consumer credit counseling agencies, and they could have resources to help you get out of debt. But before committing to this option, learn about credit card counseling pros and cons.

What is a consumer credit counseling agency?

Consumer credit counseling agencies are usually non-profit organizations that provide money management advice and debt help for those struggling with their finances. Need financial assistance? A credit counseling agency can help you:

• Improve your financial literacy

• Budget better and save money

• Learn about debt relief options

• Get out of credit card debt, medical debt, and other kinds of unsecured debt

• Find student loan counseling and bankruptcy counseling services

Consumer credit counseling agencies offer free workshops and resources. These can help you with budgeting, debt management, saving money, and establishing long-term financial goals. Credit counselors who work at these agencies can also evaluate your budget. They can discuss your financial concerns and position you to improve your situation.

If you’re having issues paying off your debt, a credit counseling agency may help. Depending on how much you owe, they could give you resources and advice to help you get out of debt. Or they can offer a Debt Management Plan to help you free yourself from debt.

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What is a debt management plan?

Consumer credit counseling agencies offer something called a Debt Management Plan (DMP, also known as a Debt Management Program) to help you manage your debts and your credit health. These plans can save you money in some cases if the counselor negotiates with your creditors to reduce the interest rates on your accounts and waive certain fees. 

Here’s how a DMP works:

1. You request an evaluation by a credit counselor. The two of you will discuss your income, monthly expenses, credit card and debt balances, and other financial obligations. The counselor will pull your credit report with a soft credit check that won’t affect your credit score. After reviewing your information, they will map out your debt relief options and let you know if a Debt Management Plan is right for you.

2. If you qualify for a DMP, your credit counselor will help you enroll. You choose which debts you want to enter into the program and decide how much you can pay each month into your Debt Management Plan account, run by your credit counseling agency to pay your creditors. 

3. Then, the credit counseling agency contacts your creditors to negotiate a lower interest rate. This reduced rate is called a concession rate. When your creditor agrees to the new terms, you countersign the agreement and start your Debt Management Plan.

4. After your Debt Management Plan is set up, you’ll pay a startup fee. Then you’ll make monthly payments into an account that the credit counseling agency uses to pay your creditors. Your credit counseling agency will also collect a monthly fee for maintaining your Debt Management Plan. 

5. You continue to pay into your Debt Management Plan account, and your credit counseling agency continues to pay your creditors until all of your debt is gone. This process usually lasts 3-5 years.

6. You must agree to make regular payments on time per your plan. If not, you could lose out on the plan’s benefits, including any negotiated discounts or fee waivers.

A Debt Management Plan isn’t for everybody. But it could be right for you if:

• You can afford to make a monthly payment toward your debts

• Your intention is to repay your debts in full

• You want help and guidance

• You don’t want to file for bankruptcy or you don’t qualify

• You want to learn how to maintain a good credit score

but you’re feeling overwhelmed by the process, need help getting organized, can get a lower interest rate. 

How do you qualify for a debt management plan?

To qualify for a Debt Management Plan, your credit card, personal loan, medical debt, and other unsecured debt should add up to 15%-39% of your annual income. But there's technically no minimum debt requirement to be eligible.

You must agree to make monthly DMP payments before a consumer credit counseling agency lets you enroll. 

Credit Card Counseling Pros and Cons

If you find you find yourself dealing with debt, you may wonder if credit counseling can do anything for you. In addition to negotiating with your creditors for a lower interest rate and reduced fees, credit counseling provides financial education that you can use throughout life to shore up your financial situation. In short, it helps you get out of debt and develop better money habits. As a bonus, you can expect fewer collection calls if you enroll in a Debt Management Plan (DMP) and are likely to experience a reduction in stress.

However, it's not all sunshine and roses. A DMP comes with its own downside. For example, unless all your creditors are willing to go along with a DMP, you could find yourself continuing to manage debts separately. In addition, some debts – including secured debts like mortgages and auto loans – cannot be included in a DMP. You cannot use existing credit or open a new credit account while enrolled in a DMP, and your monthly payments may be steep enough to stretch your budget beyond where you're comfortable. There are costs associated with a DMP, including startup and monthly fees. Finally, a DMP may reduce the amount of interest you pay, but it doesn't reduce the amount you owe.

If you're carrying substantial debt, you may find that debt settlement is a more effective alternative.

Credit Card Counseling Pros and Cons - Quick View

Benefits of Consumer Credit Counseling

One of the most attractive perks of working with a credit counseling agency is that it allows you to consolidate your outstanding debt into a single, easier-to-manage payment. 

• Single Monthly Payment: If you're looking to simplify your finances, a DMP helps by consolidating multiple debts into one payment. There's no more worrying about having different due dates or double-checking to see if you've paid each creditor the correct amount.  

• No New Loan Needed: DMPs allow you to consolidate your existing debt without taking on new debt. 

• Direct Debt Payments: All DMP payments go directly to reducing your current debt. 

• Lower Interest Rates: Credit counseling agencies negotiate with your creditors to reduce interest rates, fees, and finance charges. The goal of DMPs is to allow you to pay off existing debt within 60 months (five years). 

• Financial Education: Experienced credit counselors help you create a workable budget and build better financial habits. 

• Reduced Collection Calls: Once creditors agree to work with you through a DMP, phone calls, emails, and letters from debt collection agencies should slow down or stop altogether. 

• Credit Score Improvement: Regardless of your current credit score, completing a DMP can improve your credit score over time. Making consistent, on-time payments is key. 

• Professional Financial Advice: When you work with a credit counselor, expert advice is tailored to your unique financial situation. 

Disadvantages of Consumer Credit Counseling

Credit counseling may be a good option if you have modest debts. However, there are disadvantages. Here are some of them:

• Qualification Challenges: If you carry large debts but don't earn enough to comfortably cover them, you may find it difficult to qualify for a DMP. In addition, some creditors may not agree to participate in your DMP, which would mean carrying on with separate repayment plans. 

• Limited to Unsecured Debt: A DMP only works with unsecured debt like credit cards and personal loans. If making a mortgage or auto loan payment is a challenge, a DMP won't help. DMPs also don't deal with other debts, like student loans. 

• No New Credit: While enrolled in a DMP, you can't use existing credit or open new credit accounts, which may prove to be a challenge. You will also have to close credit accounts to prevent new debt from accumulating. 

• Fees: There are fees associated with DMPs, including a startup fee and ongoing monthly fees. These fees vary by credit counseling agency, so you'll have to research to find a program you can afford. Typically, you can expect an initial setup fee to set you back $50 or more, while monthly fees range from $40 to $70.

• Initial Credit Score Impact: The bad news is that you can expect your credit score to drop after enrolling in a DMP and closing credit accounts. The good news is, the drop should be temporary. As you make on-time monthly payments, your credit score can rebound.

• Principal Amount Unchanged: While a DMP can result in decreased interest rates and reduced fees, it won't change the principal amount owed.  

Alternative Options: If you carry substantial debt, you may find debt settlement to be a more effective option. One difference between a DMP and debt settlement is that debt settlement can negotiate to reduce the total amount of debt you owe in addition to reducing your interest rates. 

Think you’re a good candidate for a DMP after learning about credit card counseling pros and cons? Your next step is to find a reputable credit counseling agency in your area.

How to find the right credit counseling agency for you

Whether you’re seeking help with your budget or need to enroll in a DMP, here are a few resources that could help you find a credit counseling agency:

• The U.S. Department of Justice has a credit counseling search tool that could help you locate approved consumer credit counseling agencies in your area.

• The National Foundation for Credit Counseling (NFCC) also offers a search tool for credit counseling agencies near you. The NFCC is the largest nonprofit financial counseling organization in the U.S.

• You can also consult the Financial Counseling Association of America to locate a credit counseling agency in your state.

• Some counseling agencies will appear on all of these lists.

Not all credit counseling agencies are legitimate, so before you contact a credit counseling agency:

• Check out their customer reviews online

• Verify that they are licensed and accredited in your state

• Verify that they are accredited by the NFCC, the FCAA or both

If they don’t meet these criteria, you may want to keep looking.

Even if a credit counseling agency seems legitimate, keep your guard up. Plenty of companies look good on paper but could end up being scams. Here are some red flags that the credit counseling agency you’re dealing with is too good to be true:

• Credit counselors aren't certified or accredited by a third-party organization such as NFCC

• Try to charge upfront fees before they negotiate any new terms with your creditors

• Guarantee that using their service will improve your credit score

• Pressure you into a DMP without telling you about your other options

• Aren’t upfront about their fees or how their DMP works

Credit counseling agencies: the bottom line

Credit counseling agencies can offer multiple ways to deal with debt stress—from free resources to Debt Management Plans. With their help, you could be debt-free, faster, and for less money than it would take to pay off your debt by making minimum payments. But, like all other debt-relief options, credit counseling has pros and cons.

If you’re deep in debt and having trouble making minimum monthly payments, a credit counseling agency may not be the best choice. Weigh all of your debt relief options before committing to one.