Certified credit counselors work with you and your unsecured creditors (that is, debts without collateral) to create workout plans that avoid settlement and bankruptcy. Consumers often come to us with accounts charging 26% interest or higher, but through our debt management plans, our average client repays their balances in full at just 7 or 8% (depending on who their creditors are), saving them a significant amount every month and even more over the life of the plan. The enrolled accounts are closed, and you’ll make one monthly payment to the credit counseling agency, which is then disbursed to your creditors. Plans usually run from 40 – 60 months, but a few creditors will extend their interest rate concessions to 72 months.
By law, credit counseling agencies cannot lend money, purchase debts, or become your creditor. This means you can cancel a debt management plan at any time without owing the credit counseling agency any money. You’d still owe the creditors you enrolled in your plan, however.
Fees that credit counseling agencies charge are closely regulated and vary from state to state. Some states mandate a monthly formula like “$10 per creditor enrolled,” while others have a simple fee cap. It depends where you live, and your counselor can let you know your state’s rules. In all cases, the agency’s fee must be based on the client’s budget to ensure that the debt management plan is affordable.
Non-profit credit counseling agencies earn their tax status by providing counseling and education. Helping consumers repay their debts is a natural extension of the agency’s mission. Some creditors may make contributions to the credit counseling agency in exchange for working with their clients. By law, however, the majority of the agency’s income must come from client fees. That makes us keep our focus on your success.
At the time of enrollment in a debt management plan, you may lose points off your credit score because the enrolled accounts will be closed. That’s a fair trade-off for your creditors, who may be substantially reducing your interest rates and waiving your old, overlimit fees. (The credit counseling notation that may appear on your credit report is officially a neutral mark.) Then, as you make your monthly payments through the agency, your credit can improve over time, especially if you follow through on the counseling provided. Only you can control your behavior, so the agency can’t make guarantees about what will happen to your credit standing. Re-establishing a positive payment history will certainly help.
You may want to keep one credit card account open for emergency purposes, but all cards you enroll in your debt management plan will need to be closed. That’s a fair requirement from your creditors, who don’t want to see you create more debt while your interest rates are being reduced and old fees being waived.
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