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Credit counseling services can be a smart way to access professional financial advice at a low cost — or, in some cases, even for free. Usually nonprofits, these organizations can offer educational materials, workshops, and one-on-one counseling with trained financial professionals to help you make an achievable plan to repay your debts, set up a sustainable budget, and more.

It’s important to understand, however, the difference between credit counseling organizations and debt settlement agencies. The latter are usually for-profit companies that may not always be acting with your best interests in mind.

Here’s what you need to know about credit counseling, including how to tell when you might need it.

What Is Credit Counseling?

Credit counseling is a free or low-cost service offered by what are usually nonprofit organizations. Credit counselors can work with you one-on-one to offer fiscal advice and get your finances in order. For example, a credit counselor might help you:

•   Plan a debt repayment strategy

•   Create an overall debt management roadmap

•   Set up or retool your budget

•   Learn how to get a free and accurate copy of your credit report and scores

Many credit counseling services also offer educational resources, like flyers or online information, and workshops or classes that can help many people learn more about how to manage their money at once.

In some cases, credit counselors may offer to reach out to your creditors directly to negotiate with them, which could help you save money. Counselors may be able to get late fees waived, attain a longer repayment period, or ask for lower interest rates.

However, this is not the primary or sole function of credit counseling agencies, and not all credit counselors offer this service.

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How Does Credit Counseling Work?

Every individual credit counseling agency is different, and they each have their own process that they can walk you through. But in most cases, you’ll be offered an initial consultation with a credit counselor, which may take place online, in person, or over the phone.

During this meeting, the counselor will likely ask a series of questions about your financial standing, and may help you develop a budget or create a debt repayment plan on the spot. Depending on your needs, follow-up appointments may be offered, and you may also get invitations or access to free classes, workshops, educational resources, and more.

In all cases, a credit counseling agency should have your best interests at heart, and should be willing to offer you free information about their services. If a credit counseling agency requests you to pay high fees or pay up front, or refuses to work with you if you can’t afford to pay, you should look for a different organization.

Credit Counselors vs Debt Settlement Agencies

It’s easy to get credit counseling organizations mixed up with debt settlement agencies, but the two are very different — and the difference is critical. Whereas credit counselors are usually non-profit organizations that offer free or low-cost help, debt settlement agencies are very much for-profit companies.

Furthermore, debt settlement agencies charge for the service of negotiating debt settlements with your creditors or collections agencies, rather than offering a more holistic financial education or plan.

Unfortunately, many creditors refuse to negotiate with debt settlement agencies, so hiring one is often a waste of your time. If you do choose to work with a debt settlement agency, remember that under Federal Trade Commission rules , you can’t be charged for their services until they are rendered successfully. Because, again, many creditors simply won’t talk to these companies. If you pay up front, you could be out of luck). In other words, if a debt settlement agency attempts to charge you up front, take your money and run.

Alternative Options for Managing Credit Card Debt

While working with a credit counseling organization can be a great way to access low-cost help in many different financial areas, it’s not the only way to eliminate credit card debt. There are plenty of self-directed strategies that can help you get your money right, right from home.

For instance, debt consolidation is one tactic that may help you get a handle on your credit card debt. Here’s how it works.

To consolidate credit card debt, you’d take out a new loan or a new credit card that allows balance transfers at a 0% interest rate. (Yes, it sounds counterintuitive to fix credit card debt by taking out another loan or line of credit, but hear us out.)

Then, you pay off all of your credit card debts with the personal loan, or transfer all of your balances onto the new credit card. In either case, you’ll now be left with a single monthly payment rather than multiple payments, which can be hard to keep up with and easy to forget about.

Both tactics can also help you save money on interest, too, which can help you get out of debt faster and more efficiently. Different types of personal loans often have lower interest rates than credit cards do, and if you go the balance transfer route and choose a card with a 0% rate, you may save yourself from paying any additional interest at all.

Beware, though: Those 0% balance transfer rates are usually only promotional, and wear off after a certain period of time, like a year. At that point, if you hadn’t paid off the balance in full, you’d likely be stuck paying double-digit interest on whatever was left over once again.

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The Takeaway

If you’re struggling with credit card debt or simply looking for professional financial help from a budget-friendly source, pursuing credit counseling can be a smart step to take. These nonprofit organizations offer a variety of different workshops, services, and materials that can help you fashion a more sustainable financial future.

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FAQ

What is the purpose of credit counseling?

Credit counseling exists to help people find better ways to manage their money and to create sustainable budgets and debt management strategies. Usually nonprofit organizations, credit counseling agencies may offer workshops, educational materials, and one-on-one counseling services at a low cost, or even for free, to people who need some help getting their money right.

What is the credit counseling process?

While each credit counseling organization is different, in most cases, you’ll be offered an initial credit counseling consultation appointment that may last about an hour and take place in person, on the phone, or through a video conferencing platform. You may be offered follow-up appointments as well as educational resources and workshops. While most credit counselors are part of nonprofit organizations, there still may be some fees associated with their services, though these are usually much lower than a professional financial advisor’s fees.

Do you need credit counseling?

Only you can decide if you need to pursue credit counseling, but if you’ve been struggling with credit card debt and found yourself unable to create or stick to a sustainable debt repayment strategy, credit counseling could help.

Photo credit: iStock/Rockaa

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SOPL1023002

The nature of work is no longer what it used to be. Gone are the days of working for just one employer for an entire career. Now, it’s more common to move between lots of jobs.

According to a recent study by the Bureau of Labor Statistics, the average person will have more than 12 jobs during the course of their career. That’s a lot of jobs – and potentially, a lot of 401(k) accounts.

That’s because instead of the pensions that many workers in previous generations had, the average worker today is likely to have self-funded retirement accounts like 401(k)s through each new employer.

This means that as employees move between jobs, many will be left with a hodgepodge of old 401(k)s and other retirement accounts.

Is it best to leave them as they are, or to consolidate 401(k) accounts? And if so, how do you consolidate them?

Read on to learn how to consolidate 401(k) accounts, along with the pros and cons of the most popular consolidation options.

What You Need to Know About 401(k) Plans

A 401(k) is a workplace-sponsored retirement plan. If you sign up for a 401(k), contributions are deducted from your paycheck to go into your 401(k) account. Often 401(k) plans are offered to employees as a workplace benefit, like vacation days and healthcare coverage.

Some companies offer a 401(k) match. This is where a company contributes money to an employee’s 401(k) to match the amount of money the employee has contributed, up to a certain amount. A company match program can make a 401(k) a lucrative way to save money for retirement.

In addition, 401(k) plans are considered an advantageous way to save retirement money because they have certain tax advantages. For instance, 401(k) accounts are referred to as “tax-deferred” because income taxes are deferred until later, when you take the money out in retirement.

The taxation of retirement accounts is an important consideration in long-term financial planning. Taxation also acts as a guide for knowing what retirement account types can be combined, and which types cannot be combined with other retirement account types.

Because all 401(k) accounts share the same tax status (tax-deferred), they can be combined. Traditional IRAs are also tax-deferred and can be combined with a 401(k) account. This process is called a rollover.

A Roth IRA is another popular retirement account type. A Roth IRA cannot be rolled over or combined with a 401(k) or a traditional IRA account, however, because it has a different tax status. With a Roth IRA, you pay the taxes upfront (meaning you make the contributions with after-tax dollars) and your qualified withdrawals are not taxed


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Should I Combine My 401(k) Accounts?

You might be at the point during your career where you’ve got at least one 401(k) account from a previous job that you’re no longer contributing to. If you are wondering whether to consolidate your 401(k) accounts, here are a few of your options:

1.    Transfering the 401(k) account(s) into your active 401(k), meaning the one you have with your current employer).

2.    Rolling the 401(k) account(s) into a Traditional IRA at an institution of your choosing.

3.    Doing nothing, and leaving the account(s) as is.

Everyone’s financial situation is different, so evaluate the pros and cons of each option when trying to decide what is best for you. When weighing your options, here are some things you might consider:

Option 1: Rolling Over into Your Active 401(k)

Your first option with a 401(k) with a former employer is to transfer the money into your active 401(k) account with your current employer.

Pros:

1. A single place for your tax-deferred money

By transferring old 401(k) accounts into an existing 401(k), you are consolidating those tax-deferred accounts in one place. You may find managing just one account an ideal scenario.

2. Consolidating your investment strategy

Consolidation may make it easier to keep track of your money and manage a cohesive investment strategy. It can be challenging to manage a bunch of different retirement accounts.

Cons:

1. Limited investing options

Sometimes 401(k) plans have limited investing options. If this is the case with your current active 401(k), consolidating your other 401(k)s into the plan may limit your investing choices overall. Look at the investment option information provided by your plan to help make an informed decision.

2. Additional fees

Some 401(k) accounts have additional fees on both the accounts and investments themselves. Check to see if fees are assessed at a flat rate, or if they are assessed as a percentage of the amount invested. This may influence your decision to transfer your other 401(k)s into your active 401(k).

How to do it:

How to consolidate 401(k) accounts starts with contacting the institution that holds your old 401(k) and requesting a rollover to your active 401(k). The customer service representative should likely be able to help you on the phone or direct you to the paperwork online. It can be smart to clarify that this is a rollover to another tax-deferred account.

Ideally, the company is able to transfer the funds electronically to your active 401(k). If they are not able to do this, they may request an address to send a check. Get the address of the financial institution where your 401(k) is located and have it ready before making the call.

Option 2: Rolling into an IRA

Rolling old 401(k) accounts into a Traditional IRA of your choosing is a popular choice that allows you maximum control over the investments within the account.

Pros:

1. You choose the institution

You get to choose where to open your individual retirement account. By selecting the institution, you can choose a place that fits your needs. You will have control over your investment choices and whether to use an institution that charges for certain services.

This may be especially important if the institution that holds your current 401(k) charges account maintenance fees or only offers high-cost investment products.

2. You’ll control it

You open a Traditional IRA on your own and without an employer—therefore, a Traditional IRA is yours. Some people may find it helpful to think of a Traditional IRA as a “home base” for their tax-deferred money. As you move through your career, you can roll old 401(k) accounts into a Traditional IRA that’s not going anywhere—it’s your home base.

3. More investment options

As compared to some 401(K) plans, a Traditional IRA opened at an institution of your choosing may have more options for investing.

Some 401(k) plans may require that participants choose from a pre-selected list of options. If you open a Traditional IRA at a brokerage firm or other financial institution, you’ll have the benefit of a broker’s wisdom and experience should you wish to use a broker. Asking the right questions is key to making sure a broker is the right fit for you.

Cons:

1. You may still have multiple accounts to maintain

Even if you open a Traditional IRA, you may still want to contribute to your active 401(k). Therefore, you will need to maintain at least two retirement accounts. (And perhaps three, if you have a Roth IRA, which cannot be combined because it has a different tax status.)

(Still, having two accounts—an active 401(k) and a Traditional IRA—might be better for you than having many multiple 401(k) accounts scattered around at different financial institutions.)

2. It may complicate a “backdoor” Roth IRA

A backdoor Roth IRA is a way to contribute to a Roth IRA when your income is too high to contribute to one directly.

Though you’ll want to check with a tax professional, it is generally understood that a backdoor Roth IRA might be complicated if your Traditional IRAs contain a mix of pre and post-tax money that you put in.

If you want to pursue a backdoor Roth IRA, you may want to roll your old 401(k) assets into your current 401(k), or leave the account as it is. The greater the balance in your Traditional IRA, the greater the tax liability for the backdoor Roth IRA contributions since you can only contribute money that’s already been taxed to a Roth IRA.

How to do it:

If you do not already have one, you may want to open an IRA account at a financial institution of your choosing. This could be at a bank or other financial institution.

Once your Rollover IRA is active you can roll funds from your 401(k) into the Rollover IRA. The process is generally similar to that of rolling assets into an active 401(k) as noted above.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Option 3: Doing Nothing

Lastly, you may opt to leave your 401(k) accounts exactly as they are. Here are some pros and cons of this strategy.

Pros:

1. You are happy with the financial institution and/or investments

If you like your current investment allocation and investment options and want to continue using them, you may choose to leave your 401(k) as it is.

Cons:

1. Difficult to manage

It could be hard to manage a cohesive investing strategy across multiple accounts. This may be the case for someone that has multiple accounts at different institutions.

2. Cannot add money to an old employer-sponsored 401(k)

It is not possible to contribute new money to an old 401(k) account that was previously tied to an employer. New money must go into a current 401(k) or some other self-directed retirement account, such as a Solo 401(k), Roth IRA, or Traditional IRA.

If you do not currently have access to an employer-sponsored 401(k), you may want to seek out another retirement account for which you can make contributions.

3. Possible maintenance fees

Old 401(k) accounts may charge monthly or annual fees such as account maintenance fees. By consolidating, it may be possible to eliminate all or most of these fees.

For example, a person could roll old 401(k) accounts that charge a maintenance fee into an account that has no such fee, whether that be their current 401(k) or a Traditional IRA.

4. Limited investing options

Because a person does not get to choose the bank that holds their employer-sponsored 401(k), they don’t get to determine the plan’s investing options, either. Therefore, it’s up to you to decide whether the available investment options in your old 401(k) are sufficient.

The Takeaway

People may benefit from consolidating their 401(k) accounts into their current 401(k) or into a Traditional IRA, if for no other reason than to consolidate their money under one roof.

It can be hard to manage a bunch of different accounts at different institutions, and may only get harder as individuals progress through their careers and end up with even more 401(k) accounts.

In general, a Traditional IRA can provide more flexibility and investing options than a 401(k). It means that you’ll be managing two accounts, yes, but it might be worth it to keep a Traditional IRA as a home base to roll all old 401(k) accounts into over time.

When you open an IRA, you’ll want to find a bank or financial institution that meets your needs. Many investors prefer institutions where they will not be charged with unnecessary fees and have access to low-cost investing options.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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