Is Credit Counseling Worth It?

Credit card debt affects millions of Americans, and older adults are no exception. Today’s seniors are shouldering more debt than ever, in fact. Median total debt for older-adult households with debt was $31,300 in 2016—more than 2.5 times what it was in 2001.

Medical expenses plus the soaring costs of food, utilities, and housing may leave some seniors with no other choice but to use credit cards. But when that debt becomes overwhelming, they might find themselves struggling to make timely payments. And that’s not good news.

What happens if you don't pay a debt?

When you don't pay your debts, they’re sent to debt collection agencies, which may be aggressive in pursuing the money owed. In addition, your credit score may be negatively affected. This could make it difficult to take out a loan in the future (e.g., if you decide to downsize and buy a smaller home). It could also affect your efforts to get a part-time job during retirement, since many employers check credit reports. A poor credit score might even impact your ability to enter assisted living or a nursing home down the road.

Excessive credit card debt is a problem you can’t ignore. If you’re stuck with bills that you can no longer manage, it may be time to consider consumer credit counseling.

What is credit counseling?

Credit counseling is a debt relief option that involves unbiased, one-on-one guidance from a trained, certified counselor. These counselors specialize in credit card debt versus other types of debt like mortgages and medical bills.

Your first session with a credit counseling agency will often be free of charge. It might be conducted face-to-face, online, or over the phone. Before meeting with a counselor, you’ll want to know all your monthly expenses such as food, utilities, and gas. It’s also good to have financial paperwork on hand such as credit card and bank statements, bills, and pay stubs if applicable.

During the meeting, your credit counselor will review your income, assets, and debt to determine how best to address your situation.

If you choose to continue working with a credit counseling service, they may:

• Help you create a manageable household budget and prioritize your spending.
• Provide you with educational materials or access to seminars on personal finance topics (e.g., using credit responsibly).
• Explain the pros and cons of options like debt consolidation, bankruptcy, and debt settlement.

Most credit counseling agencies will also offer to help you set up a debt management plan that makes it easier to keep up with payments.

What is a debt management plan?

A debt management plan (DMP) allows you to roll several of your credit card balances into one monthly payment at a reduced interest rate. This plan typically lasts from 3 to 5 years, during which you're not allowed to add to your credit card debts. The goal of a DMP is to completely pay off your outstanding financial obligations.

If you choose to move ahead with a DMP, your credit counselor will contact your creditors and advocate on your behalf. They’ll negotiate a payment amount that fits comfortably in your budget and they may even be able to get you a lower interest rate. Under the new payment plan, you'll make a single monthly payment to the plan's administrator who then distributes the money to your creditors. DMP program requirements are usually strict. You can’t miss more than one or two payments, or you might be eliminated from the program.

A debt management plan is a straightforward, fixed plan that eliminates the need to juggle different payments and due dates. It can help you meet your debt obligations without worrying about late fees and harassing calls from debt collection agencies.

How to choose a consumer credit counseling service

Debt relief is big business, and there are a lot of scammers out there that prey on people burdened with debt. That’s why it’s important to do your research. Here are some tips for finding a credit counselor you can trust:

1. Start by getting referrals from family and friends. You might also check with your financial institution to see if they can suggest a reputable, nonprofit credit counseling service in your area. NCOA recommends GreenPath Financial Wellness, a nonprofit agency rated A+ by the Better Business Bureau (BBB). GreenPath offers certified credit counselors to help you navigate your way out of debt.

You can also search for credit counselors online. These organization’s websites offer state-by-state directories:

• National Foundation for Credit Counseling (NFCC)
• Financial Counseling Association of America (FCAA)

2. When you find a credit counseling service you're interested in, check with your state's attorney general's office or your local consumer protection agency to see if the business has had any complaints filed against it.

3. Ask the company about the debt assistance services they offer and the completion rate for their debt management programs. Find out the types of fees they charge. While the initial credit counseling session is often free, many agencies charge a setup fee plus a monthly fee. These can range from $30 to $100 dollars per month.

Is credit counseling right for me?

Credit counseling isn't for everyone. It's not a good option if most of your debt is in secured loans such as mortgages, auto loans, or home equity loans.

If you enroll in a debt management plan, you’ll likely be required to close (deactivate) your credit cards. Lack of credit utilization during your plan period could potentially lower your credit score for a time.

However, working with a consumer credit counseling agency can be a worthwhile debt relief option if you:

• Are having trouble affording monthly debt payments for multiple accounts.
• Want to resolve all your debt in a limited timeframe.
• Would like to understand how to manage your finances better.
• Prefer to have guidance when working toward your financial goals.

Being in debt is nothing to be ashamed of. Knowing the debt relief options available to you can help you take control of your finances and reclaim your peace of mind.

Want to learn more about debt assistance, money management, and more? Visit NCOA's Money for Older Adults resource hub.