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 Perhaps you've finally reached the conclusion that you need some relief or help getting out of debt. Perhaps a friend has told you how a nonprofit debt counseling session is really the way to go. That seems to make sense right? Why hire a for-profit counselor when you can hire a non-profit debt counselor?
In this article we're going to discuss some of the things that a consumer should look out for when choosing to work with a particular debt or credit counselor - which includes a discussion of the kinds of services a good debt counselor will provide. We'll also help you to find a good counselor and finish up with some warnings on what can happen to your credit rating after reorganizing your debt.
For Profit versus Non Profit Counseling
Like many things in life, making a decision between for-profit and non-profit counseling is not such a black and white decision. That's because the growing use, or abuse, of credit cards has resulting in a sharp increase in the competition among those in the debt / credit counseling service industry.
And whenever money is involved, you can be sure that some unscrupulous business will appear - ready to take advantage of the situation. This has resulted in many businesses professing to be non-profit, when in fact they've found many ways to make a profit from your individual financial situation.
That being said, here are a couple of things to consider. Let's say you manage to find a non-profit debt counselor from a reputable organization. This type of organization will likely depend on community volunteers that may or may not have a lot of experience in counseling. You may be fortunate to be assigned to a good counselor, or you might wind up with someone less experienced.
Let's compare this situation versus finding a for-profit counselor from a reputable business. Under these circumstances, there is a much greater chance that the person assigned to be your counselor will be a professional that is trained in debt counseling.
Finding Good Debt Counselors
If you've decided to explore non-profit debt counseling, make sure they have a 501(c) (3) form on file. If you are looking for a company via the web, they will probably mention this status on their "About" page. You can also find quality non-profit debt counseling member companies by searching in the National Foundation for Credit Counseling or NFCC website.
If you're looking for a professional debt counselor, then you can search for information on the American Association of Debt Management or AADMO website. These two organizations attempt to apply some quality measures to this industry and often they refer you to local or state agencies that maintain lists of qualified debt counselors. These credit organizations not only have training standards for counselors, but also require that member companies abide by their ethics standards too.
Services Provided by Counselors
The types of services provided by debt counselors will vary, depending on your individual circumstances. Usually the counselors will educate clients in the basics of home finance, including creating a budget. The counselor will want to have a detailed understanding of your current financial situation and together you will lay out a plan for recovery - which is often referred to as a debt management plan or program.
Again, depending on your individual situation, services could range from budgeting to debt negotiation with creditors, all the way through consolidating your individual loans or credit cards into a debt consolidation loan. The nice thing about working with a good counselor is that they will attempt to minimize the impact your actions might have on your credit rating.
Debt Counseling and Credit Ratings
Just because you've reached out to a debt counselor for help does not automatically mean that your credit rating will be affected. As a matter of fact, good counselors will often help to minimize the current impact a poor payment history is having on your rating. And if you can solve your debt problems by creating a better household budget, then there should be no impact on your credit rating.
But as we've mentioned in our article on credit scores there are five components that credit rating agencies use to calculate your FICO score:
- Payment History - Paying your bills on time helps your score while late payments hurt your score.
- Outstanding Debt - The more you owe others relative to the credit you've been extended, the lower your credit score.
- Credit History - The more information a credit bureau has on your payment patterns, the more certain they can be about your future payment patterns. You get a higher credit score if you've got a longer credit history.
- New Credit - If you've recently applied for credit, this will be weighed against you. In other words, the more new credit you apply for, the greater your credit risk until you establish a good payment pattern.
- Miscellaneous Factors - These are minor factors that can be used to calculate your credit score such as the different types of loans you have outstanding.
If you decide to work with a non profit debt counselor and you touch any of these factors that go into your credit score, then there is a very good chance that your credit score will decline. The good news is that studies conducted by Georgetown University's Credit Research Center showed that consumers who were recommended for a debt management plan (DMP) by credit counselors and chose to start payments had a significantly lower incidence of bankruptcy. And the creditworthiness of consumers who participated in debt management programs actually improved.
Credit Repair Services
Finally, be wary of counselors that promise you extensive debt or credit repair services. The only practical thing a counselor can do to help clean up your credit report is to remove inaccuracies in the credit history portion of the report. If they find something on your report that doesn't belong there, they are skilled at getting it removed.
If your credit report is an accurate account of a poor payment history, there is simply nothing they can legally do to change this fact. The most important thing is to turn things around as quickly as possible by reestablishing the kinds of payment patterns that creditors are looking for in a borrower.
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