The thought of talking in depth to someone about your debt can seem very intimidating — which is one reason people may be hesitant to pursue credit counseling. However, consumer credit counseling is a typically free service that connects borrowers with counselors qualified to look over their budgets and offer debt-related advice.
Another reason some people may find themselves resisting the idea of meeting with a credit counselor is that stubborn tendency to want to handle it all yourself — even if you’re having trouble staying on top of bills and putting a real dent in your debts. Looping in another person/organization may make debt feel more “real,” and may even conjure certain feelings of shame for some who’ve failed to manage their debts privately. Others may have heard horror stories of friends or colleagues getting taken advantage of by a scam agency — which is rare but can happen.
Let’s clear up some misconceptions about credit counseling today and take a closer look at whether or not it actually works.
What the Data Says About Credit Counseling’s Effectiveness
Researchers at The Ohio State University evaluated the outcomes for a group of consumers who had participated in credit counseling through a program called Sharpen Your Financial Focus (Sharpen) vs. a group of people who had not. Both groups contained over 6,000 clients.
The results? Sharpen clients reduced their revolving debt by almost $6,000 in the year and a half following counseling — which is approximately $3,600 more than the control group during the same timeframe.
The control group, containing those that did not participate in Sharpen, actually saw their debt go up slightly, while Sharpen clients reduced their total debts by nearly $9,000.
Those who underwent credit counseling had increased their amount of available credit by 19 percent six quarters later — a faster rate than the control group. Credit utilization rate, or this amount of available credit in play, is factored heavily into credit scores.
Finally, two-thirds of Sharpen participants said they believe the program helped them improve their money management abilities. Nearly three-fourths of participants (73 percent) say they’re making payments on their debt more consistently as a result. Seven out of 10 participants believe they’re more financially confident now.
These are the results of but one study. However, they do demonstrate some of the potential benefits of credit counseling as demonstrated by data.
What Does Credit Counseling Entail?
Your next question may be about what you can expect from credit counseling. Well, it depends. There are two possible components: Meeting with a credit counselor, and enrolling in a debt management program (if you choose to do so and qualify).
The appointment with the credit counselor can be in person, over the phone or online. During this usually hour-long appointment, the creditor will look at your budget and your debts — and help you “develop a personalized plan” for dealing with your finances, according to Investopedia. It’s important to choose a reputable agency, which is why it’s a good idea to ensure affiliation with the National Foundation for Credit Counseling or Association of Independent Consumer Credit Counseling Agencies.
After looking at your finances, your counselor may present the option of signing up for a debt management plan (DMP). If you go this route and your creditors agree, you’ll start making a payment each month to the agency, which will then distribute those funds to your lenders. DMPs often span three to five years, and you may earn a reduction on interest rates or cancellation of certain fees for abiding by the terms of the program. While your counselor may recommend a DMP, it’s ultimately your choice to enroll — so do your homework first.
Credit counseling can work. Success depends upon choosing a reputable agency and being completely forthcoming about your financial situation. You may even decide to pursue a DMP following your initial consultation.