What Is Credit Counseling?

Credit counseling isn’t just one thing—it’s a whole set of financial tools to address debt. The best part is that, if you aren’t quite sure where to start, a credit counselor could help you figure out which tools might work for you, and guide you in how to use them. 

It’s worth getting to know all that credit counseling has to offer—a great first step in handling debt. 

What Is Credit Counseling?

Credit counseling is a service for people who want help managing their debt. Credit counseling organizations are usually nonprofits funded by credit card companies. They generally offer some or all of these services:

• Budgeting in connection with debt counseling

• Personal finance workshops in connection with debt counseling

• Debt management plans (DMPs)

What Services do Credit Counselors Offer?

Here are some of the things credit counselors can do if you sign up for a program to deal with your debt:

• Establish a debt management plan (DMP). A DMP is a structured plan to fully repay all of your unsecured debts within 3-5 years. With a DMP, you make one monthly payment, then the credit counselor can divide it between your creditors for you.

• Analyze your spending to look for ways to cut expenses. An objective outsider may be able to help you uncover opportunities for reducing expenses.

• Create a workable budget based on your income and spending. A budget needs to be sustainable so you can support it on what you earn, without borrowing. A credit counselor can help you make sure that’s true.

• Explain how credit works, and how best to use it. A credit counselor can help you understand common types of credit and their (often expensive) terms. 

• Develop a strategy for managing and paying down debt. This usually takes a long-term plan, and there may be several parts to it.

• Explore ways to improve your credit rating. A credit report shows what has hurt your credit in the past, and it reveals opportunities for improving your credit. 

• Show you how to correct credit report errors. In analyzing your credit report, you and your credit counselor may find mistakes or outdated items on the report. A credit counselor can help you get credit report mistakes corrected. 

Nonprofit credit counseling agencies typically also offer one-time credit counseling workshops that are required for people going through bankruptcy or getting certain types of mortgages.

How Does Credit Counseling Work?

Credit counseling can take several forms, so the details of how it works vary. But the process starts with a credit counselor getting to know the details of your financial situation. 

This often involves an initial session of 30 to 60 minutes with a credit counselor in person, over the phone, or online. The credit counselor usually asks about all your debts, expenses, income, and financial resources. 

Debts include any loans or credit card balances you need to pay. A credit counselor will want to know the total amount you owe on each, the interest rate for each, and the amount of the monthly payments. If you’re behind on payments, it’s important to cover that as well.

Expenses include anything you regularly spend money on. This includes financial commitments like rent payments, as well as other expenses like groceries and clothing. 

A credit counselor also needs to know about your income—not just how much it is, but whether it’s steady or varies. To complete the picture, the credit counselor should learn about any assets you have, like bank and investment accounts, and property or other items that are worth a lot. 

With this information, the credit counselor can set up your plan.

Is Credit Counseling Worth It?

Credit counselors generally charge a fee for their services. The size of that fee depends on the counselor and on what type of services you need. (We’ll cover the full details later in this article.) 

Is credit counseling worth the time and the cost? In a DMP, a credit counselor might be able to negotiate with your creditor to lower your rate or waive late fees. These concessions are typically only available if you agree to participate in a DMP and make all your payments on time. DMP payments are usually high because they're designed to fully pay off your debt in 3-5 years. Keeping up could be difficult if your required payment isn't affordable.

If you sign for a DMP, a credit counselor might help you set up a budget to match your income, so you can cut down on any unnecessary expenses, and the cost of borrowing with credit.

Making these positive changes to your finances could result in a better credit score, so you can pay less for credit in the future. You could also be in a position to solve debt problems in the future and avoid issues like losing assets or access to credit.

You may also find credit counseling helps with your peace of mind. Knowing there’s a way out of debt problems can help you and your family rest easier.

Benefits of Credit Counseling

Here are some of the benefits that credit counseling can offer:

• Professional guidance. Trained counselors understand how to solve debt problems, and how to work with creditors. 

• A personalized debt management plan. Everyone’s path out of debt is slightly different. A DMP could help you pay off your debts with professional guidance and support. 

• Long-term financial health. Besides helping with immediate debt problems, credit counseling can set you up for your financial future if you agree to go through their program. Gaining a better understanding of how credit works, budgeting, saving for emergencies, and avoiding debt traps can help keep your finances trouble-free.

• Emotional relief. Debt takes more than just a financial toll. Debt stress can affect your physical and mental health. The support of a credit counselor can reduce stress by helping you feel more in control of your finances. 

• Increased financial confidence. People often can get into debt trouble quickly. Credit counseling can help you get out. This can help you feel more in control of your future.

Potential Drawbacks of Credit Counseling

To fully understand credit counseling, it’s important to know that there may be some drawbacks to go along with the benefits:

• Benefits are limited to program participants. Credit counseling agencies don't provide financial education to people who are struggling to budget and manage their money. You only get that kind of coaching if you enroll in a program and let the agency help you deal with your debt.

• Temporary credit score reduction. Joining a DMP typically requires closing your credit card accounts. Closing credit card accounts that still have a balance is all but guaranteed to have a negative effect on your credit. As you pay down your balances and make your payments on time, your score could rebound over time. In the long run, successful credit counseling should help you earn a stronger credit score. 

• Fees. Many nonprofit credit counselors offer a free initial consultation. After that, the services you choose may involve set-up and maintenance fees. 

• Limited creditor participation. Not all creditors are willing to participate in a DMP. They aren’t required to. A credit counselor may only be able to help with some of your credit accounts.

• Requires commitment. Many credit counseling programs, and in particular DMPs, are like joining a gym. You have to put in the work over the long haul to make it succeed. This can mean living without credit, making agreed-upon payments, and sticking closely to a budget.

How Much Does Credit Counseling Cost?

While an initial consultation with a credit counselor is usually free, there's typically a cost for services.

One-time credit counseling workshops for bankruptcy eligibility or your mortgage lender are usually under $100.

DMP costs vary, with different states’ regulations allowing different fee levels. Get any credit counselor to spell out the costs of a DMP before you commit. It might also be a good idea to check with more than one credit counselor to make sure the fees for the one you choose are competitive.

DMPs typically involve a set-up fee, then an ongoing monthly fee. The monthly fee is especially important, since debt management plans can take 3-5 years to complete. 

Using some typical DMP fees as an example, here is an illustration of how much one of these plans might cost you in the long run:

Set-up fee: $35

Monthly fee: $50 x 48 months  = $2,400

Total: $2,435

If you’re low-income, you have a financial hardship, or you’re in the military, the agency might agree to waive or reduce your fees.

The cost can be significant, but it can be worth it if a DMP helps you get control of your finances. If you can stick with the plan and pay down your debts, a DMP could help you avoid costly outcomes such as bankruptcy or getting sued for credit card debts.

Does Credit Counseling Hurt Your Credit Score?

Simply meeting with a credit counselor shouldn’t impact your credit score unless the counselor performs a hard check of your credit reports. Hard credit inquiries can show up on your credit history and knock a few points off your scores. 

If you close your credit card accounts, that probably will cause your scores to drop temporarily. Closing your credit card accounts may be a condition of participating in a DMP. When you close a credit card account that has a balance greater than zero, it looks like a maxed-out credit card. That's likely to have a negative effect on your credit standing.  

If you stick with a credit counseling program and reduce your debt, your credit score may improve in the long run. 

What Credit Counseling Can’t Do

Credit counseling isn’t a magic wand. Here are a few things it can’t do:

• Reduce your debt

• Instantly improve your credit score

• Convince all creditors to go along with a payment plan if they don’t want to

• Make payments affordable if you don’t have sufficient income

• Help you with budgeting and money management if you don't sign up for a DMP

You should be suspicious of any credit counseling program that claims to accomplish any of the above results. 

Where to Find a Credit Counselor

Here are some sources that can help you find a credit counselor in your area:

• National Foundation for Credit Counseling (NFCC)

• Financial Counseling Association of America (FCAA)

• United States Trustee Program (if you need pre-bankruptcy credit counseling)

You can check out any credit counselor you are considering with your state’s attorney general’s office or consumer protection bureau. This can help you find out any history of complaints. You can also check consumer review sites, including the Better Business Bureau.

What Is the Difference Between a Credit Counselor and a Debt Consultant?

In a nutshell, a credit counselor is someone who helps you find a way to pay off debts. A Debt Consultant is someone who helps you understand your options for settling debts for less than what you owe. This process is often referred to as debt settlement or debt relief.

Debt settlement may be an option if you can’t afford to pay your debts in full even with the help of a credit counselor. Putting your financial problems behind you with the help of credit counseling can put you on better footing to build and maintain good credit.