A study published in the journal Economic Inquiry found consumers tend to lose significantly more debt when they work with a credit counseling agency than when they try to go it alone. Here’s how a credit counselor can help, and how you can find the right one.
You may have better odds of getting rid of your credit card debt if you enlist the help of a credit counseling agency, new research suggests.
A study published in the journal Economic Inquiry found consumers tend to lose significantly more debt when they work with a credit counseling agency than when they try to go it alone.
For example, the study compared the credit files of more than 6,000 consumers who participated in a nationwide credit counseling program run by the National Foundation for Credit Counseling with the credit files of statistically similar consumers who did not participate.
Those who received credit counseling lost more debt overall, and they also paid or negotiated down significantly more credit card debt.
See related: 8 steps to reducing credit card debt
Consumers who sought counseling shed nearly three times more debt
At the start of the counseling program, consumers in both of the study groups owed close to $16,500 on their credit cards. After a year and a half, participants who received credit counseling shaved their credit card balances by roughly $5,600, on average. Consumers who didn’t receive counseling, by contrast, managed to pay down an average of just over $2,000.
Some of the credit counseling participants cleared their balances by discharging their debts in bankruptcy or by negotiating lower, more manageable payments or other changes in their terms. Others got rid of their debt the more common way: by diligently paying down their balances.
Credit counseling agencies traditionally provide a number of structured programs that help consumers shrink their debt loads, including debt management plans and bankruptcy counseling. But even credit counseling participants who didn’t participate in these types of programs tended to be more successful paying down their debt, the study found.
“This research shows some of the most rigorous evidence to date on the benefits of nonprofit credit counseling in helping distressed households manage their debt levels,” said study co-author Stephen Roll in a news release.
Consumers not only gain access to structured debt repayment plans when they seek help from a credit counselor. They also benefit from personally tailored financial advice and coaching.
The study builds on previous research that’s also found consumers who seek help from a credit counselor tend to be more successful conquering their debt. A 2007 study published in the Journal of Consumer Affairs, found consumers who participate in credit counseling not only tend to lose more debt overall, they also demonstrate healthier credit behavior over time, such as using up less of their credit limits and paying their bills on time.
How credit counseling can help
Nonprofit credit counseling agencies provide a wide range of services to consumers, many of which are free. For example, a nonprofit credit counselor may help you analyze your budget and find areas where you can trim your spending and put the extra money toward your debt.
Many credit counseling agencies also provide free education services that can help you manage your money more confidently and avoid common mistakes. For a fee, a credit counselor may negotiate a debt management plan on your behalf so that your debt is more manageable. Or they may help educate you about other programs that can help.
In addition to providing you with specific tips and action plans, working with a credit counselor may also help focus your attention on your finances and on ways you can improve your financial outlook, the researchers in the Economic Inquiry study said.
“Consumers often enter credit counseling in a time of crisis,” write researchers. “By participating in the counseling session, consumers may pay more attention to the management of their income and their use of debt, which in turn may lead to lower overall levels of consumer debt.”
See related: How to slay your credit card debt with ‘small wins’
How to find a credit counselor
When you’re searching for a credit counselor, look for an accredited nonprofit credit counseling agency that has reasonable debt management fees and free education or counseling services.
The Department of Justice has a list of approved credit counseling agencies for consumers who are seeking mandatory counseling before they declare bankruptcy. The National Foundation for Credit Counseling also connects consumers to NFCC certified counselors.