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Can I flunk out of credit counseling?

October 29, 2013
Ask Erica
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QDear Erica,

I'm considering credit counseling for my credit card and medical debt. I do freelance/contract work, so my income is not very steady. I don't know much about credit counseling, but I know I've got to close down the cards and make a regular payment. So what happens if I can't even keep up with those payments? Do I flunk out of counseling? Does that hurt my credit more? If I drop out of the plan, will I have trouble getting another counselor to work with me in the future? – Simone

ADear Simone,

I'm so glad you're asking these questions! Not only is it important for you to know what you're in for before visiting a credit counseling agency, but other worried borrowers can benefit from the answers. Fear of the unknown keeps too many from seeking outside assistance.Ask Erica

OK, so let's get going. You have some financial obligations that you'd like to take care of. If you qualify, debt management plans (or DMPs for short) offered by nonprofit agencies can help you meet that goal.

DMPs can work well for people who fit a basic profile. You might be a good candidate if:

  1. You want a third party to step in. When people enroll in these plans, they generally walk away feeling relieved. It simplifies life. All they need to do is make sure there is enough money in their account for the DMP payment. The agency disperses those funds (for a small administration fee) to the creditors. They act as an intermediary, so while you still owe your creditors, you don't have to deal with them directly. DMPs are set up so you'll be in the black within five years, but you can delete it faster if you choose. Oh, and many credit issuers reduce interest rates for those on the plan, too. That can make a big difference in the amount of finance charges you're assessed.
  2. You can consistently meet the payment. You seem concerned about this part. But the credit counselor will review your budget, checking your income as well as your expenses to make sure the payment is feasible — not just for a month or two, but for the term of the DMP. Because your earnings fluctuate, your counselor will determine a baseline of what you have flowing in that you can count on. For example, one month you may earn $5,000 and the next $1,000, so they may ask if you're comfortable with an average monthly income of around $2,500. Counselors won't push you into anything. They want you to feel secure that you can afford to meet your necessary expenses and put money into savings while paying down your debt. If you can't, the plan won't work.
  3. You hold certain types of debt. Only unsecured balances can go on the plan. That includes credit card balances and medical bills, so you're good there. If you also have a mortgage, car loan, student loan, parking tickets or other types of secured or legal debts, you'd have to administer those on your own.
  4. You are ready for a credit diet. You're right — the credit cards you put on the DMP would have to be closed. However, you are permitted one card to be left off the plan. Your counselor will also ask you to not enter into any new liabilities while you're using their program. Not that they check, as it's on the honor system, but it really is a smart idea. Why get into fresh debt as you're working the old stuff down?

If you skip DMP payments, the agency will eventually drop you. Any interest rate reduction you received though them will revert to the rate you had before. I wouldn't consider it flunking out, though — it just didn't work out. In the event you do go on the DMP, but have trouble with the payment, call the agency. They may be able to rework the plan. Even if you're already dropped, they can usually put you back on — assuming you're quite sure that you can make the payments.

As for your credit score, a DMP is not a scoring factor. Paying on time and debt reduction are, however, and using a plan can help you with both. If you do drop out of a debt management plan, it's probably because you stopped making payments. Those missed payments are what will hurt your credit score — not the fact that your DMP didn't work out. While you're on the plan, your credit report may indicate that you're using an agency to pay off your debt, and a lender may find that notation to be positive, negative or neutral. In other words, it's subjective.

So, if you qualify, credit counseling could be a great solution for you. Plus, never worry about a counselor's opinion of you! Trust me. They've heard it all before.

Got a question for Erica? Send her an email.




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