Swamped with COVID-19 credit card debt? Here’s one way to get help

It’s normal to carry debt to buy a home, go to school or get you through a tough time. But when life doesn’t go as planned — like when a global pandemic strikes — that burden can turn into a crushing weight.

One in five Americans says debt makes them feel physically sick each month, according to a 2019 study conducted for Northwestern Mutual. The same number say they’ve lost track of how much debt they have.

And some types of debt have been growing during the coronavirus crisis. Almost half of U.S. adults — 47% — say they’re currently carrying credit card debt, up from 43% in early March, a CreditCards.com survey says. Nearly a quarter of consumers with credit card debt say they’ve been taking on more.

If any of this sounds familiar, you may want to consider credit counseling.

How credit counseling works

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Typically offered by nonprofit organizations, credit counseling can come in the form of advice or direct assistance. Many services are offered for free.

A one-on-one meeting with a trained credit counselor — which, for social distancing, can be conducted online or over the phone — takes between 20 minutes and an hour. Your counselor will review your finances, teach you about debt, lay out your options and draft a personalized plan to get you back on track.

You’ll want to come prepared with any documents you might need, detailing your income, debt, expenses and assets. And make sure you know your credit score and grab a copy of your credit report beforehand. You can get both for free online.

What can credit counselors offer?

Advice on household budgeting. Sometimes all you need is someone with experience to examine your income, expenses and financial goals and help you figure out how to balance them.

If you find this kind of guidance helpful, you might one day consider hiring a certified financial planner to help save and invest for retirement.

Assistance with student loans. Your counselor will try to optimize your payment plan, which may involve talking to your lender. In more serious cases, they may suggest consolidating your loans, applying for forgiveness or even declaring bankruptcy — though it’s tricky to wipe out student debt that way.

If you’re comfortable taking the reins, you can skip the potential fees by refinancing your student loan debt on your own. It’s simple nowadays to shop around for a better loan that can get you out of debt years faster and save thousands in interest.

Help with housing. You may need advice if you’re struggling to make rent or pay off an oversized mortgage — now is a great time to refinance — but it’s not a bad idea to seek guidance before you buy a home or (if you’re a senior) get a reverse mortgage.

Debt management plans. If advice isn’t enough to salvage your situation, your counselor might offer to take over. Debt management usually involves a set-up fee and a monthly fee, but the savings can be substantial.

The agency will negotiate with your creditors to reduce monthly payments, lower interest rates and schedule an end to your debt, typically over the course of three to five years. You’ll hand over money each month to the agency, which will use it to pay all of your creditors.

If that sounds familiar, you may have already looked into debt consolidation. Instead of paying a credit counselor to handle things, you can easily get your own low-interest personal loan and use it to pay off your credit cards and other bills. That way you only have one low monthly payment to worry about.

Preparation for bankruptcy. This would be your final option, if there’s absolutely no end in sight to your debt. You’ll attend one session before filing and another after you’re discharged, helping you understand the lasting effects of bankruptcy and how to avoid disaster in the future.

How to choose a credit counseling agency

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You can get credit counseling through a standalone agency or larger organizations like universities, credit unions and housing authorities.

Take note: Just because an organization brands itself as a credit counseling agency doesn’t mean it’s nonprofit. And even nonprofits can give bad advice, charge outrageous fees or pressure you for donations.

Doing your research beforehand will save you a world of trouble. Here’s what to look for:

  • Demand accreditation and certification. Check to see whether the agency is a member of the National Foundation for Credit Counseling or the Financial Counseling Association of America. Both organizations certify their members, ensuring a certain level of education and quality, and require accreditation from outside bodies, ensuring professional standards of conduct are being met.

  • Check for complaints with the Better Business Bureau, your state’s attorney general’s office and local consumer protection agencies.

  • Ask about costs upfront. The price of counseling services varies widely from agency to agency. Depending on what you need, you may pay nothing at all, a one-time fee or a monthly fee. In general, it’s possible to get information and advice for free but expect to pay if you want a counselor to negotiate with your creditors.

Lastly, make sure you don’t sign up with a debt settlement company by mistake.

How are debt settlement companies different?

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Lots of organizations will offer to help you with debt. Debt settlement companies are some of the most controversial.

While debt management plans focus on extending terms and lowering interest rates, debt settlement companies try to get your creditors to give up on much of the money you owe.

The company will argue you’re broke and won’t ever be able to repay your creditors in full. To make the case more persuasive, you may be asked to stop paying your bills while they negotiate. If the gambit is successful, your creditors will accept a lump sum from you — “Hey, at least we get something” — and wipe away the remainder.

Sounds like a steal, but the scheme has real drawbacks.

First off, these efforts might not work at all, because many creditors refuse to negotiate with such companies. Second, debt settlement operations are usually run for profit — and may not be able to get you a better deal than you could get on your own. Finally, not paying your bills can tank your credit score, trigger penalties, summon debt collectors and get you sued.

Before even thinking about debt settlement you’ll want to look hard at your other options, like rolling your debts into a lower-cost debt consolidation loan.

Don’t wait until you’re desperate

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One of the biggest misconceptions is that credit counseling is useful only to people who have dug themselves in deep.

Don’t be afraid to get proactive with your finances. Credit counseling can be a smart idea if you’re about to take on a large amount of debt or feel yourself slipping behind on your payments, particularly during the current economic crisis.

Either way, whether you’re in trouble or just looking for advice during these difficult times, a little help can be a great blessing.

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