How Credit Counseling and Financial Education Can Help You Manage Debt

Lyle D. Solomon | January 19, 2023

The purpose of credit counseling is to assist consumers with financial difficulties. Credit counselors are trained to help people with a wide range of money issues, like debt management, budgeting, home purchases, and insolvency.

Credit counseling is helpful, but being financially literate is even more important because it helps you avoid economic distress by preparing you to deal with specific financial obstacles.

When dealing with finances, it is crucial to both understand how credit counseling works and become financially literate. In this article, we’ll explore each of these concepts in detail.

What is credit counseling?

Credit counseling describes various services inteded to empower consumers to manage their personal finances better. Credit counselors' primary duties involve providing individual guidance and establishing debt management plans, but they also offer various related services.

When deciding between a for-profit debt relief service and a free credit counseling agency, it's essential to know the differences. Many nonprofit credit counseling agencies have ties to the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA), two of the most prominent professional credit counseling associations. The initial counseling appointment rarely costs anything. In some cases, like when setting up a debt management plan or similar debt relief services, there may be a nominal fee involved.

However, credit counselors who work for a fee are not members of the NFCC or FCAA. Additionally, a for-profit debt relief organization might require payment before providing its services instead of offering free credit counseling.

Credit counseling services offered by nonprofit organizations and for-profit businesses may differ from one another. Understanding this is crucial for realizing the potential benefits of working with a credit counselor.

What is financial literacy?

In today's world, where money plays such a significant role, being financially illiterate can have serious consequences. The Financial Industry Regulatory Authority (FINRA) estimates that 66% of Americans are financially illiterate, but fortunately, efforts are being made to improve this situation.

Financial literacy refers to a person's familiarity with and competence in various financial topics and activities, such as money management, budgeting, and investment. Understanding the ins and outs of personal finance is an ongoing process that forms the bedrock of your relationship with money. When it comes to money, financial education is crucial to success, so the earlier you get started, the better.

How does credit counseling help manage your finances?

When working with credit counselors, there are various services to choose from. Below, we’ll explore the potential services offered through credit counseling and how they each relate to achieving financial literacy.

Budgeting

During the first session, you discuss various aspects of your finances, such as your income, expenses, and financial goals. At the end of this session, you and your counselor may discuss whether additional counseling, such as assistance with managing your debt or debt counseling, would benefit you. If needed, keeping your financial obligations in mind, your counselor will create a budget to help you manage your finances.

Debt management plans

Debt management plans (DMPs) let you simplify and combine your debt payments while reducing your interest rate and fees. Credit counseling services typically require clients to make a single monthly payment over a period of three to five years to repay the debt, which is then split among all of the client's creditors. A credit counselor can assist you in enrolling in a DMP if you struggle to pay off your debt. There is usually an initial setup fee and a recurring monthly fee.

Credit reviews

An expert credit counselor can look over your credit reports, point out any discrepancies that could be dragging down your score, and offer advice on how to go about disputing them. They can shed light on the factors boosting or dragging down your score and offer advice on taking concrete action to improve your credit report.

Student loan counseling

Counseling for student loans can help you create a strategy for handling and paying back your debt. If you still have trouble keeping up with your monthly payments, a counselor will review your repayment or refinancing options and may even mediate discussions with your lenders. Depending on the services provided, some aspects may be free while others cost money.

Housing and homeownership counseling

The NFCC provides homeownership counseling to those interested in purchasing a home but want to ensure they are ready financially. Moreover, if you are having trouble paying your rent, counseling services can help you handle them. Homeowners who are having trouble keeping up with their mortgage payments may be able to get help in the form of a loan modification. However, depending on the services selected, a fee may be required if you have issues with your rent.

Reverse mortgage counseling

If you are a homeowner exploring reverse mortgage options to use your home's equity, having a credit counselor review your finances is a good idea. Credit counseling services can help you assess your current financial situation and advise you on the best course of action.

Preventing foreclosure

You can talk to a credit counselor about your options for avoiding foreclosure if you are behind on your mortgage payments or are at risk of falling behind. They can provide you with possible solutions like a loan modification, a short sale, or a deed in lieu of foreclosure.

Bankruptcy counseling

Planning to file for bankruptcy is a serious decision, and getting advice from a bankruptcy counselor can help you weigh the pros and cons. By talking to a counselor, you can find out what a bankruptcy filing could mean for your finances and credit rating.

Usually, two financial counseling sessions are required: one before filing for bankruptcy and another just before your debts are dismissed. Each session has a nominal cost.

Is credit counseling the right fit for you?

Credit counseling programs do not always solve financial woes. Not all forms of debt are suitable for this method. This is true even for unsecured debt, and it requires a unique set of conditions to materialize. Those are reasonably generalized conditions, but they won't apply to everyone.

Below are some factors to consider when determining if credit counseling if the right fit for you:

• A minimum of $5,000 in unsecured debt is typically required. If the amount you owe is lower than that, you should pursue DIY options.


• To qualify for a lower monthly payment, you must have some income. This strategy will only help if you are currently employed and have other means of financial support.


• Your best bet is to keep most of your accounts open with the original creditor rather than letting them go to collections. A debt settlement may be your best option if your debts have already been turned over to collectors. While technically, collections accounts could be included in a DMP; collectors are less likely to accept such repayment terms. Moreover, collection accounts do not have interest charges; therefore, you won't be able to use the benefit of reduced interest rates provided by credit counselors.


• If the majority of your debts consist of unpaid medical bills, you gain no benefit from reduced interest rates. In this case, you should talk to the original service providers about payment plans or a settlement.

What should you look for in a credit counseling agency?

Credit counseling services are largely nonprofit organizations nowadays. But this doesn't mean any company advertising itself as a credit counseling agency is genuine just because it has this designation. It's not uncommon for businesses to pose as legitimate credit counseling services when they aren't. That's why it's crucial to go in with a plan and know what to look for in a credit counseling service.

Do they have certification and accreditation?

Checking the agency's accreditation and certification status is one way to ensure that it is legitimate. Any business claiming to offer credit counseling services for a fee should raise red flags.

Most nonprofit organizations are associated with the National Foundation for Credit Counseling or the Financial Counseling Association of America. Both organizations expect counselors to obtain proper certification to maintain a consistent level of training and expertise among their respective counselor ranks. Moreover, they need accreditation, in which an independent organization evaluates standards of conduct.

Has the Department of Justice sanctioned them?

The United States Department of Justice (DoJ) maintains a registry of credit counseling agencies that have been granted permission to provide pre-bankruptcy counseling. The bankruptcy counseling session mandated by law before filing in the U.S. can only be provided by organizations recognized by the Department of Justice.

You can check online to see if U.S. bankruptcy courts have authorized a given organization to provide such counseling. If you need to find any local agencies that meet these requirements, you can use the Department of Justice's agency locator tool to find one.

Are they easily accessible?

Choose a credit counseling service based on your preferred method of receiving services (phone, in-person, or online) in order to get the most out of your money. Even though many organizations are recognized in all 50 states, most provide face-to-face support services in only a limited number of locations.

Are there any costs for their services?

Service prices are determined by several factors, including the offering organization, the recipient's state, and financial circumstances. Knowing how much you'll pay each month before committing to a service is essential.

It's important to distinguish between nonprofit and for-profit credit counseling companies. For-profit organizations typically provide services that the consumer can perform on their own.

What are the components to help improve your financial literacy?

Financial literacy consists of many financial components and skills that enable a person to learn about efficient money and debt management processes.

Improving one's financial situation requires studying and putting into practice many skills, including creating and sticking to a budget, handling debt, and investing.

The following are the most basic concepts and methods of personal finance management.

Budget your money

When it comes to financial planning, a budget is primarily determined by one of four primary uses for money: spending, investing, saving, or giving. Finding the right balance between these lets people spend their money more wisely, which leads to financial security and success.

The goal of any reasonable budget should be to eliminate debt while setting some money aside each month for savings and wise investments.

Make goals for yourself

You set a large goal in saving money, like a down payment for a house. After paying your monthly bills, you set aside a small amount for this goal. Once the goal is completed, it will give you the satisfaction of doing something for yourself and your financial growth.

Review your credit report

The federal government established a website through which consumers can annually request a credit report for free from each of the major credit bureaus (Experian, Equifax, and TransUnion). Look over these reports and notify the credit reporting agency of any inaccuracies you find if you want to dispute them. Since you are allowed three per year, spread out your requests so that you are constantly checking in with yourself.

Invest your money to grow your wealth

If you want to improve your financial literacy, one of the first things you should do is study the fundamentals of investing. In order to make sound financial decisions, you should understand how interest rates, prices, diversification, risk management, and indexes work.

With better knowledge about the factors that make up a successful investment, you can make better financial decisions that will ultimately increase your wealth.

Borrowing

Most of the time, almost everyone must take out a loan at least once. Knowledge of interest rates, compound interest, the time value of money, repayment schedules, and loan structures is essential for careful borrowing.

A person's financial knowledge will increase if the above criteria are well understood. This will help them make better borrowing decisions and decrease long-term financial pressure.

Manage your debt

You can keep your debt under control by adjusting your budget to spend less money and pay off your debt faster. Think of a strategy to reduce debt, such as focusing on the loan with the highest interest rate. If you have too much debt, talk to your creditors about refinancing, consolidating, or enrolling in a debt relief program.

Invest in your future

If your company provides a 401(k) retirement savings account, enroll and put away as much as you can each year to qualify for the employer match. Start saving for retirement early by opening a Roth IRA and investing in a wide range of asset classes like stocks, bonds, and commodities. If you need help calculating how much money you'll need to retire comfortably, talk to a financial advisor who can point you in the right direction.

Understand taxes

Understanding the various taxation methods and how they affect one's income is essential to becoming financially literate. Each type of income, whether earned, invested, inherited, or unexpected, is subject to taxes.

Having a firm grasp on the various income tax rates promotes fiscal security and enhances business results through better income management.

Personal finance management

Personal financial management, the most crucial characteristic, involves a combination of all the factors mentioned above.

To make sure you have financial security, you need to find a good balance between all the different types of financial components we’ve discussed. For example, you can increase your investments and savings while reducing borrowing and debt.

One's level of financial literacy is sure to rise in tandem with the depth of their understanding of the points covered above.

How can financial literacy benefit you?

A higher standard of living is possible when people are financially secure, and you can achieve this stability by improving financial literacy.

Following is a list of some of the advantages being financially literate:

• You will have better decision-making skills in financial matters.
• You’ll be able to manage your finances and debts efficiently.
• You’ll be better fit to achieve monetary objectives.
• You can cut costs through better financial regulation.
• You will worry and stress about money less.
• Studies show you may make better moral choices when searching for and using insurance, loans, investments, and credit cards.
• You will be able to arrange a sensible, organized budget.

Taking the time to increase your financial literacy is an important life skill that can help you live more securely, with less stress and an increased ability to achieve your financial objectives.

Where can you get financial literacy?

When it comes to improving one's financial literacy, there are many options beyond simply talking to others.

Here are a few websites that can assist in expanding one's knowledge of personal finance:

• MyMoney.Gov: The Federal Financial Literacy and Education Commission created this platform to aid its users with the following financial activities: Spending, Earning, Saving, Investing, Protecting, and Borrowing. The website also includes budgeting worksheets and other money-related tools.


• The Penny Hoarder: The Penny Hoarder, founded by Kyle Taylor as a blog to share the creative ways he saved money, now attracts about 2.3 million unique visitors per month looking for motivational and actionable tips on personal finance. Finally, it includes unorthodox strategies to pay down their debt, such as extreme couponing and working a second job from home.


• EconEdLink: EconEdLink is a service provided by the Council for Economic Education (CEE). The CEE is a distinguished U.S. group working to improve students' economic and financial literacy in grades K to 12.


• InCharge: The mission of InCharge is to educate and inspire consumers through ebooks on personal finance management.


• Money Smart: Offer free resources for teaching about money management, including podcasts, lessons, and games

Any of the above are promising avenues to explore if you want to improve your financial literacy.

Settle your debts with SoloSettle

If you find yourself overwhelmed with debt and facing potential legal action, debt settlement might be your best option for relief.

Debt settlement involves working with creditors and debt collectors to settle your debt with a lump-sum payment, generally for less than you originally owed. In fact, most debts settle for around 50% of the original debt amount. This means you can save money through settling and give yourself a financial reset.

SoloSettle, powered by SoloSuit, is a tech-based approach to debt settlement. Our software helps you send and receive debt settlement offers so you don’t have to deal with creditors and collectors directly. When you’ve reached an agreement, SoloSettle helps you manage the documentation and make your payments, keeping your financial information private and secure.

Below is a review from a real SoloSettle customer:

“I'm very thankful for SoloSettle. Having a third party negotiate the settlement was instrumental in resolving this case and saved me from two giant headaches: 1) I didn't have to deal with the plaintiff's lawyer and 2) I didn't have to go to court. I also love that the payment was processed through SoloSettle. I was nervous about sharing my personal financial data with the other side, but SoloSettle protected that for me. I hope I never get sued again, but if I do, I would use SoloSettle again in a heartbeat.

SoloSettle really saved me a ton of time and heartburn and kept me from having to be my own lawyer in court.”

Bottom line

Credit counseling and financial literacy are important parts of money management. Understanding and adequately knowing them can help you be more financially stable. Before joining, you should research credit counseling agencies and financial literacy websites. Debt settlement is also a great option to help you get back on track financially. Once you've paid off your debts, you'll have a much easier time managing your money thanks to your newfound financial savvy.

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)

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Guides on how to beat every debt collector

Being sued by a different debt collector? Were making guides on how to beat each one.

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Is your credit card company suing you? Learn how you can beat each one.

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