What Can a Credit Counselor Do?

Key Takeaways
  • Credit counseling agencies offer debt relief through debt management plans.
  • Credit counselors seek lenderconcessions, which can include re-aging an account, reducing the interest rate, and waiving late fees.
  • A debt management plan requires you to repay 100% of the debt within five years.
  • Lenders control the concessions offered through a debt management plan.

Struggling with debt, here is the miracle you have been looking for….

We want miracles to solve problems. An easy and painless route to redeem us. One drug that will alleviate every ailment and one financial solution will eliminate all our money problems. Credit counseling is often pitched as the one size fits all debt relief solution. The problem is, credit counseling has limited applications.

Below are the debt relief credit counselors offer. If you need help beyond this, credit counseling might not turn out to be the miracle drug the industry is selling.

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How Does Credit Counseling Offer Debt Relief?

Credit counseling agencies offer services that include debt management plansor DMPs. When you enroll in a DMP, the agency works with creditors on your behalf to provide relief in three ways:

  • Re-age the account, bringing it current. Once the bill returns to current status, late fees (and sometimes penalty interest) cease, and you will repay the debt under the original loan terms.
  • Secure a lower interest rate on the outstanding balance. The new interest rate is not retroactive. The balance remains the same, but going forward, the company charges a lower rate. More of the monthly payment reduces the principal with reduced interest charges and allows you to repay the debt sooner.
  • Receive fee waivers for recent fees due to late payments. Waived fees can lower the amount owed. Late fees hoover around $36 for each occurrence, which could save you $100 or more off the current balance.

Can Credit Counseling Help Pay Off High-Interest Debt?

Credit counseling agencies use the above strategies to lower the cost of your debt. The creditor decides if and how much they are willing to offer in concessions.

The agency will establish a repayment plan to eliminate your debt within five years based on your budget and the anticipated creditor concessions. Each enrolled lender must approve the plan before repayment begins.

Once approved, you make one monthly payment to the credit counseling agency, and they make payments to each creditor based on the approved plan.

You save money through the lower interest rate offered and any waived fees. Participants save an average of $140 per month.

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How Does a Debt Management Plan Affect Your Credit?

Debt management plans offered through credit counseling agencies often result in a lower credit score.

Credit scoring companies establish your score based on information found in your credit report. The credit report contains data on your repayment history, the amount of debt you have in relation to credit limits, the number of credit applications, length of credit history, and so forth.

When you enter into a DMP, creditors close enrolled accounts,impacting both the length of your credit history and credit utilization.

Credit history makes up 15% of your FICO score and calculates the average age of open accounts. Closing multiple accounts will often shorten your credit history.

Credit utilization accounts for 35% of your score and calculates the ratio between open credit lines and the current balances. While having high balances negatively impacts your score, closing accounts with balances also increases credit utilization and lowers your credit score.

Lastly, the presence of a DMP leads to a notation about the enrollment on each account. This notation does not directly affect your score but discourages companies from approving additional credit while you are in the program.

  • How does credit counseling provide debt relief?

    Credit counseling can help you repay credit card debt if you are overextended. You must enroll in a debt management plan and be able to repay creditors in full within five years to qualify. You save money through lower interest rates and waived late fees.

  • How long will credit counseling stay on my credit report?

    Credit counseling lasts up to five years. Companies report your participation in a debt management program for the duration of your payments. After paying off the debt, the notation drops off. However, any late payments remain on your file for seven years.

  • Is credit counseling a good way to pay off high-interest debt?

    Credit counseling might be the best debt relief option if you can repay 100% of your outstanding balances within five years. Creditors must agree to a new repayment schedule and typically offer some relief through a lower interest rate and/or waived late fees.