If you’re struggling with debt and don’t see a light at the end of the tunnel, working with a credit counselor may be your best move. Credit counselors are trained to help you manage your debt and understand credit, cash flow, and budgeting. They will take a holistic look at your financial situation, then help you craft a plan to get out of debt and handle your money problems once and for all.
While this may sound like exactly what you need, it’s important to note that all credit counselors are not created equal. The Federal Trade Commission (FTC) says that most reputable credit counselors work for nonprofit firms. But it warns that “nonprofit” status doesn’t guarantee that their services are “free, affordable, or even legitimate.”
Some credit counseling organizations are known for charging high fees, which they try to hide with layers of complexity. The FTC also notes that credit counselors sometimes ask for voluntary contributions to their business, even if making those contributions would put you into more debt.
Obviously, you’ll want to avoid credit counselors with high fees or shady practices. Before you choose a credit counselor, approach the situation with a list of questions to ask right away.
1. Is this a nonprofit credit counseling agency?
While this may seem like an obvious question, credit counselor Joseph Martin of Take Charge America, a national nonprofit credit counseling agency, says this question is crucial to ask right away. Because there are many different types of debt relief organizations with similar names and very different services, you should make sure you’re speaking to a credit counselor instead of a different type of business, he says.
If you think you’re speaking with a credit counselor but are instead speaking with a debt settlement company, for example, you could wind up receiving advice that doesn’t help you reach your goals. Credit counselors offer budgeting and financial education services. They can also help you create a plan to get out of debt by paying off your debts, often at reduced interest rates, through a long-term debt management plan (DMP). Doing so will eventually help to rebuild your credit.
By contrast, for-profit debt settlement or debt relief companies focus on helping you negotiate a settlement for your debts that is less than what you owe, and this may cause your credit score to plummet. These are totally different services, and what works for one person may not work for another. (See also: 4 Ways to Negotiate Credit Card Debt)
Even though “nonprofit” credit counselors can charge hidden fees, you’ll still want to know if you’re working with a nonprofit organization, says Martin. Why? “The initial financial assessment, budget, and education are always free with a nonprofit,” he says.
Since a nonprofit credit counselor offers free advice that you can use even if you decide not to move forward with their services, seeking out a nonprofit is a solid first step. (See also: 8 Organizations That Really Can Help You With Your Debt)
2. Are you accredited?
A smart way to weed out unethical or substandard credit counselors is to find out if the credit counseling agency belongs to the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Members of these industry associations must be accredited by the Council on Accreditation and must “abide by specific guidelines, ensuring consumers receive a…
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