How Credit Counseling Works and What It Costs

Credit counselors go over your income, bills, and debts, and help you create a plan. You can choose not to enroll in a debt management plan. You can benefit from the counseling appointment and create a plan on your own.

The specifics depend on what you want to know, especially regarding cost. You may be able to get budget counseling at no cost. Setting up and using a debt management plan (DMP) may cost you. To use a DMP, you make one monthly deposit to the plan administrator. That agency then makes payments to your creditors. You need to inquire how much of your payment goes to each creditor and what, if any, concessions your creditors have agreed to make.

What you should leave the first session with

This session should provide an idea of your household finances and what you are able to pay, rather than being a marketing session for a program. A financial analyst (counselor) considers money that is brought into your household and where money goes. This analysis could include a credit report, but a credit report does not reflect money spent on food, child care, or other living expenses.

Recent pay records, bills, and statements related to your debt are to be found in the following. For each, provide the statement balance, interest rate, minimum payment, due date, and whether any amount is overdue. The variation in your hours or earnings should be shown in addition to, and not instead of, the best month shown.

Include costs that are not monthly. Examples of these costs are car registration and insurance. Proposed debt payments may appear affordable to you. However, you may not be able to pay your normal expenses once the payment is made.

Request a budget and information about next steps. Next steps may include dealing directly with a creditor, changing the order in which you make payments, or starting a DMP (Debt Management Plan). Opting for a debt repayment strategy would occur prior to routing your payments through a debt management agency. You may request more time to review and consider the recommendations.

What credit counseling and a DMP can cost

Distinguish between charging for advice and charging for plan administration. Investigate whether charges are different for the initial session and follow-up sessions. Inquire whether charges are different for developing and implementing a DMP. Not all services provided by a nonprofit are free.

American Consumer Credit Counseling charges a $39 enrollment fee and monthly fees of $7 per credit account, with a maximum total monthly fee of $70. They also provide a free budget consultation. Clients should be aware that fees can be negotiable based on financial hardship or state legislation. Published fees can vary by agency. Prior to signing an agreement, clients should have a quote for the fees they will be charged.

The quote should include any up-front costs, as well as any continuing fees. If the fees charged by the agency are based on the number of accounts you have, determine what happens to those fees as you pay off accounts. Make sure you negotiate a lower agency fee if the current fee would make it unusable. Also determine whether there are any charges that are truly optional.

A $450 payment can mean two different things

Scenario: An agency charges a $30 monthly service fee in addition to $420 monthly payments to creditors. A setup fee of $60 is charged. The fees and duration of the plan remain the same for 4 years.

A quoted payment of “$450 plus our $30 fee” brings your monthly cost to $480. To figure out the total cost, you have to determine if the agency fee is included in the quoted payment or charged in addition to it.

The example provides $20,160 as the payment made to creditors. Principal and interest shown in the hypothetical schedule are both included in this amount. This represents neither the starting debt balance nor expected savings. If interest rates and payoff schedules for the accounts are known, a realistic proposal can be made. Projected interest should not be added to payments if it is already shown in the payments in the schedule.

Which debts and creditor terms are in the plan?

Credit card debts and other unsecured personal loans are common types of debts that can be included in a DMP. Certain medical debts and certain personal loans may also be included, if the creditor and agency allow it. Secured debts such as mortgages and auto loans are not included. These kinds of debts also should be included in your budget so that you can make the necessary payments.

A DMP allows you to repay your debt in full over a period of years, with the possibility of a more favorable interest rate and/or a waiver of fees. A DMP is different from a debt consolidation loan and debt settlement. A debt consolidation loan results in a new loan to repay the debts. Debt settlement, on the other hand, involves repayment of less than the total debt owed.

Each proposed account should have the following information in the written plan:

• The creditor and account being paid.
• Whether the creditor has accepted the proposal.
• The agreed interest rate and any fee changes.
• The payment amount and when the creditor must receive it.

Consumer Financial Protection Bureau suggests that you first verify each creditor’s participation in a DMP before transferring any money to the DMP counseling agency. A rate recommended by a DMP counselor is not a formally approved rate.

If a creditor refuses to participate in your DMP, you need to analyze whether the plan will still work if that creditor is excluded. If not, you will have to work out an alternative plan to repay that creditor. The household debt payment will be the agency payment plus payments for accounts not included in the DMP. The agency may state that your total debt payment has been reduced, but a comparison of the total payment you previously made to the payment the agency will forward may be misleading, since the agency figure will not include payments for accounts not included in the DMP.

Expect changes to card access, not a promised credit score

Certain actions may be taken regarding your credit cards, depending on your situation. For example, your credit card issuer may close your credit card accounts or prevent you from using your credit cards. Additionally, you may be restricted from opening new credit card accounts. Before joining the program, you should contact your credit card issuers to find out which credit cards will be affected. You should also consider changing the payment method for recurring monthly charges to a payment method that will not be affected.

Closing a card does not delete its balance. It can impact your credit utilization ratio. This ratio shows the relationship between your credit limit and your balance. You can impact your credit utilization ratio by reducing your balance. Making payments on time can also improve your credit. Lack of timely payments can impact your credit negatively.

Accounts being repaid through counseling may be noted as such by creditors. FICO states that these notations do not hurt a FICO Score. Lenders can see the notations and may consider them when making lending decisions. The account changes, and payment history still matters. No counselor can guarantee a particular score change.

Follow the first payment all the way to each creditor

Enrollment will not immediately update your due dates. Your agency’s deposit date is independent of your creditor’s payment due date. There needs to be a period of time in between for the agency to process and send the payment.

Secure the start date for each account prior to transfer. Verify the upcoming payment with the agency and the creditor. Make your normal payments until the situation is replaced by the new arrangement. When a change in payment due date is required, confirm the new due date with the creditor.

Let’s say you have a bill due on the 10th and your first agency deposit scheduled for the 12th. There’s a gap between those dates and, by itself, signing a financial hardship plan does not resolve that timefulness issue. Resolve the gap with your agency and creditor before the due date. Additionally, review your automatic payments to ensure you don’t make duplicate payments or, worse, don’t stop payment on the only payment scheduled to be made on the due date.

After payment is made, check both the agency’s records and the creditor’s statement. Make sure the amount was credited, the date of credit was recorded, and the rate agreed to was recorded. A withdrawal by the agency from your account indicates the money was taken from your account. It does not prove that the creditors received their money.

Report any missing payments to the appropriate agency and the creditor as quickly as possible, and retain your bank records and confirmation of payment. Collection activities will not stop, and time will not be temporarily extended just because you schedule a counseling appointment. Answering a collection letter and arranging payment of the debt should be considered as different tasks.

When the payment will not fit, or stops fitting later

A DMP can be lengthy, sometimes lasting several years. While on a DMP, you must be able to pay normal household expenses and debts outside of the plan. You must be able to demonstrate to the counselor how you will pay normal household expenses if your budget only works with charges from cards you had to stop using. It is of no benefit to have a lower payment if you can not meet household expenses.

What other strategies did the counselor look at? You can talk to creditors about hardship arrangements by yourself. Think about the costs of debt consolidation. These costs might include fees and interest. A longer repayment term might also lead to a smaller monthly repayment amount. However, if your budget can not support the smaller monthly repayment amount, you should look into bankruptcy. You might need to see a bankruptcy attorney.

Make sure you’re able to speak to someone regarding payment issues before you sign anything. Contact your state regulator to find out if the agency is required to have a license in your state and if they are licensed. You have the right to ask about the counselor’s training and certifications. You also have the right to ask if agency employees earn commissions based on the plans enrolled. Consult your finances and make sure they’ve been reviewed before acting on a recommendation.

If your income declines, contact the agency prior to the next scheduled deposit. Generally, a reduction in the amount deposited does not change the amount creditors will accept. Find out which payments would be reduced and if the creditor would be allowed to withdraw a reduction in a fee or charge.

Know how to terminate the plan as well. Learn about the cancellation process, what happens to money held while the plan is in effect, and any refunds. Get this in writing. Learn what creditors expect of you after the plan ends. Stopping agency service does not end your obligation to pay the creditors. Arrange the next direct payments before the agency stops making them.