Is Credit Counseling For You?
If you’re struggling to manage your debt, trust us, you’re not alone. In fact, Americans have over $1 trillion dollars in credit card debt. Life happens, unplanned for emergencies happen (sometimes more often than we’d like).
No matter how deep your financial trouble may run, help is available. Credit counseling can help you get out from under your debt and on top of your finances.
What is Credit Counseling?
It’s exactly what it sounds like: Credit counseling helps consumers negotiate debt settlements with creditors through education, budgeting tips and other resources. The end goal is to help reduce or eliminate debt and keep it that way for years to follow.
What Do Credit Counselors Do?
A credit counselor will take a look at your entire financial picture and help you come up with a plan to eliminate (or at least reduce) your debt and start saving for the future. Credit counseling is a partnership, therefore, the more information you can provide such as credit card statements or recurring monthly statements, the better your solution will be.
Everyone’s situation is different, so transparency with your credit counselor is key. There’s absolutely nothing to be ashamed of because finances are never one size fits all. The counselor will help you establish an individualized plan that fits your goals and lifestyle.
Do I Need Credit Counseling?
There’s no direct answer, because again, everyone’s situation is different. However, there are a few things to consider before you seek out the service of a credit counselor.
You're Only Paying Minimums
You may pay your credit card bills every month but if you're only paying the minimums, it feels like the balances never get any smaller. And you're right. By only paying the minimums, you're just paying on the interest that continues to accumulate and doesn’t make a dent on the overall account balance.
You're Charging Basic Expenses
Basic expenses like food, utilities, and rent or mortgage payments should be paid from your checking account because you've budgeted for them. If those expenses are going on credit cards, you may need help to set up a budget so you can eliminate your dependency on credit cards.
You’re Taking Cash Advances or Payday Loans
Taking a cash advance against a credit card is actually worse than charging an expense on a credit card. The interest starts accruing immediately on a cash advance, there is no grace period as there is when making a purchase on the card (the time between the charge being made and the payment due date) and the APR is often higher for a cash advance than for purchases.
Payday loans should be avoided all together. They're predatory lending with an annual average APR of 400% but sometimes it can be as high as 750%. People often take out one payday loan as a stop gap but can't pay it back immediately and borrow more money creating a cycle that's very difficult to get out of.
You're Afraid to Face Your Numbers
It can be scary to face how much debt you're really in and many of us don't. We manage to pay our bills without actually looking at the total we owe. Even worse, sometimes the fear is so paralyzing we ignore it altogether and just start throwing any envelope from the credit card companies into the shredder.
A credit counselor can help you face that fear so you can take control of your debt rather than letting the debt control you.
You Have No Plan
If at the end of the month you take whatever money you have left and apply them to your debt, randomly, you may need assistance carving out a debt reduction plan. A credit counselor can you help you develop a plan and budget that works effectively so you can see real results.
Does Credit Counseling Ruin Your Credit?
Your credit score is made up of six factors; payment history, utilization, derogatory marks, length of credit history, total accounts, and credit inquiries. Taking out a personal or debt consolidation loan will not lower your credit score, it will actually improve it!
Your utilization (how much of your available credit is being used) will decrease and your total accounts will increase. Many people believe that the more credit accounts you have, the lower your score but the opposite is true.
Potential lenders want to see a variety of accounts including credit cards and loans like personal, student, home, and auto.
When you work with a credit counselor, you have a wonderful opportunity to improve your finances. It's important to take full advantage of what the they offer. Stick to the budget you've worked out, avoid taking on new debt and don't continue to add to the credit card balances you are working to pay down.
A credit counselor can not only help you conquer your debt but to understand the reasons you accumulated the debt in the first place. For some of us, it’s straight forward: we had a period of unemployment, we didn't have an emergency fund to cover unexpected expenses like an urgent car or home repair, or we incurred medical debt.
For others, it's just a lack of personal finance education or bad habits that we fell into. Whatever the reason, your counselor can teach you better money habits so you don't fall back into the same debt trap.
Take Control of Your Finances
Tackling your debt can be scary at first, but by taking control of your money, you take control of your life. The unknown is what is frightening. Once you face your debt and have a workable plan to eliminate it, you’ll feel relieved.
You don't have to do it alone. A credit counselor can guide you through the process. We also have some wonderful educational resources available on our website that can help you to get started on your journey to financial freedom.
* Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances. The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.