Debt relief services can seem overwhelming when you’re already struggling with debt. It’s difficult to know which options will work for you, and there’s no one solution that works for everyone.
Credit counseling is one option. Here’s what you need to know about whether it will be the best fit for your financial situation.
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Table of Contents
Key points
- Credit counseling can be a good way to learn about budgeting and money management
- Credit counseling is mostly free
- A Debt Management Plan set up by a credit counselor can be a good way to pay off $6,000 or less in credit card debt
- DMPs have a monthly administrative fee ranging from $25 to $80 per month
- It can take up to five years to successfully complete a Debt Management Plan
- If you have more than $6,000 in unsecured debts, debt settlement or debt consolidation may be better options
READ MORE: 5 easy steps to pay off $10,000 in credit card debt
How credit counseling works
Credit counseling is a valuable resource for almost everyone. Who wouldn’t benefit from free advice on managing your money and debt at some point — especially when schools include so little financial education?
Credit counseling sessions can help everyone develop financial savviness and organization. Nonprofit credit counseling agencies exist to provide information and discipline at a low price — often it can even be free.
What credit counselors offer
- An objective, well-informed third party who can answer questions and keep people accountable
- Financial literacy that can help them analyze your spending practices and pinpoint personal weak points
- Budgeting that eliminates waste while still respecting individual needs and priorities
- Help with pulling credit reports, understanding credit history, and improving credit scores
Pro tip: Credit card companies and other creditors usually fund consumer credit counseling agencies. Because of this, their services are mostly free. However, if you commit to a Debt Management Plan to get out of debt, you will have to pay a small monthly fee.
READ MORE: Top debt relief companies
But credit counseling won’t be enough for people with severe problems.
For example, it won’t necessarily work for:
- People with more than $6,000 in credit card debt
- People whose debts are not related to credit cards: credit counseling isn’t effective if your debt problems are due to medical bills, personal loans or student loans.
- Those who’ve lost their only source of income
- Those with no emergency savings.
Pro tip: Credit counseling won’t solve everyone’s financial problems. But it is almost always a great place to start and can help people build financial momentum. Counselors help people figure out what clients need to do, give them the tools to do so, and keep them accountable.
Folks who fall into these categories will be better off exploring debt settlement programs, debt consolidation loans or even bankruptcy.
That said, a good credit counselor might still be able to make a helpful referral. Advice from a financial expert can’t hurt in a crisis, especially when their services are free.
READ MORE: Debt settlement vs. debt management
Pro tip: While debt settlement and debt consolidation work with all types of unsecured debt, including medical bills, personal loans, payday loans and private student loans, consumer credit counseling works best for people who are overwhelmed with credit card bills.
Consumer credit counseling can help you become debt-free
Credit counseling gives people the tools, education, and guidance necessary to improve their finances.
Credit counseling agencies offer many services, but Debt Management Plans are the primary way to use credit counselors to become debt-free.
Debt Management Plans
Credit counseling starts off with a free consultation. During this step, your credit counselor will carefully review your finances, budget and existing debts. They will even review copies of your credit reports.
This information will determine whether a Debt Management Plan will be an effective debt relief option for you.
DMPs won’t be free. Many credit counseling agencies charge a small monthly administration fee ranging from $25 to $80 per month.
This fee entitles you to:
- Representation: During the DMP, the counselor will act as a middleman. They’ll intercede between you and your lenders. Some predatory lenders use less-than-honorable tactics to get their borrowers to pay. That often includes badgering them with phone calls at all hours. When those borrowers participate in a DMP, the creditors deal directly with the credit counselor. That can often save clients a lot of stress.
- Negotiation: Counselors take over all communication with a client’s lenders. They’ll use that opportunity to negotiate as best they can. If possible, they’ll try to get the lenders to agree to better debt terms for the borrower. This usually involves negotiating lower monthly payments and lower interest rates.
- Repayment simplification: A DMP also consolidates your monthly payments. Instead of paying each lender directly, they set up a repayment plan so that you only have to make one monthly lump-sum payment to the credit counselor. The credit counselor uses those funds to make your monthly payments.
Pro tip: Borrowers who benefit most from a DMP often juggle a half dozen or more credit card payments at a time. The payment plan greatly reduces the likelihood of missing one and paying a late fee.
A DMP is usually only effective for borrowers who are really struggling with their debts.
Some credit counselors may push DMPs when they aren’t necessary. If you’re uncertain don’t work with them. Remember that DMPs are not free. The credit counselor might just be looking for money. Instead, set up a consultation with another debt relief agency to get an impartial opinion.
Free evaluation
Nonprofit credit counselors usually offer at least one free consultation. For example, Credit.org provides a free call with one of their credit coaches to anyone who needs it.
The initial meeting gives the counselor a chance to assess the client’s finances. They can provide some initial advice, depending on how much information the client brings.
If the counseling relationship continues, it will usually include a complete financial review. That means the counselor will examine the client’s:
- Income and expenses
- Outstanding debt balances, both secured and unsecured
- Monthly payments on each of their debts
- Rates and terms on each of their credit accounts
- Financial goals and priorities
- Other details that might affect their finances (like an upcoming marriage or a child on the way)
They want to get as comprehensive a picture of the client’s finances as they can. But giving this type of sensitive information away to the wrong party is dangerous. So make sure to work with a reputable nonprofit credit counselor.
The nonprofit status doesn’t guarantee they have their client’s best interests at heart. And even if they’re legitimate, share all personal information securely. In-person or by phone is best, if possible.
READ MORE: Debt relief or bankruptcy — which is better for you?
Education and recommendations
After the initial assessments, counselors pitch their plan to improve the client’s situation. That entails working on the client’s money management skills and financial issues.
For example, the plan may include:
- Free credit advice: The credit system’s penalties for bad behavior lead to even more bad behavior. For example, defaulting on a loan leads to higher interest rates. Higher interest rates lead to defaulting on loans. It’s a vicious cycle. But credit counselors can break it. They can help their clients get by without credit until they improve their scores.
- Resources and referrals: Nonprofit counselors don’t have much financial interest in keeping anyone’s business. The major credit card companies subsidize many agencies, so they’re much less likely to work with someone when it’s not a good fit. Instead, they can point people toward the help they need.
- Custom spending plan: Credit counselors build spending plans that address their clients’ cash flow issues. That usually includes a realistic budget and a way to hold the client accountable. Many financial problems stem from a lack of discipline, which counselors can reign in.
Pro tip: Implementing an effective financial recovery often takes more than a single consultation. The counselor may need to meet with their clients regularly to get them all the help they need.
READ MORE: Are you drowning in debt?
More credit counseling services
Credit counseling involves working closely with a licensed credit expert. Counselors can help people with a wide range of financial situations, including:
- Debt counseling
- Building a budget
- Improving credit scores
- Bankruptcy counseling
- Whether debt settlement is right for you
- Debt management programs
- Student loan debt
- Credit card debt
- Financial education
- debt consolidation counseling
- housing counseling for homebuyers
- Counseling for homeowners facing foreclosure
- Teach financial literacy
Credit counseling organizations and certified credit counselors are the most common providers of credit counseling services. Because many are nonprofits that rely on donations and government funding, their services are more affordable than others. A nonprofit credit counseling agency shouldn’t turn anyone away because they can’t afford to pay.
Pro tip: People struggling with their finances can almost always benefit from nonprofit credit counseling, even if it isn’t a viable debt relief option. The initial credit consultation should always be free, so it can’t hurt. And it will provide some general advice and point people in the right direction.
READ MORE: Need help now? Free money and other assistance
How to choose a credit counseling agency
Look for accredited counselors through a reputable nonprofit organization, and avoid for-profit companies or unaccredited organizations. Check customer reviews and Better Business Bureau ratings.
Here are some of the top places to search:
The National Foundation for Credit Counseling (NFCC): This is the largest nonprofit credit counseling organization in the U.S. Each member agency is certified through the Council on Accreditation.
The Financial Counseling Association of America (FCAA): The FCAA links those seeking counseling with member agencies that meet the organization’s quality standards. Bear in mind, though, that the FCAA also works with for-profit agencies.
The U.S. Trustee Program: This is a search tool maintained by the U.S. Department of Justice. You can filter by state and language. The program vets every agency it recommends.
Narrow your search to a few top candidates, then check the reputation of each through Trustpilot, the BBB and your state attorney general’s office. Schedule a free consultation to see whether your top candidate is a good fit.
READ MORE: How to eliminate expenses and boost savings
What to look for in a credit counseling agency
Look for a credit counseling agency that is affordable, reputable, and honest. There’s no need to settle on any of these. They should cause no financial strain, have a stellar reputation, and communicate clearly.
Here are some of the items to inquire about when shopping around for the best options:
- A list of all the services that they provide as part of their counseling
- A corresponding list of the fees for contracting their services
- The training and professional certifications that their counselors earn
- Proof of their license to operate and offer credit counseling services
That isn’t an exhaustive list, but it’s a good place to start. If any of their answers to these questions are unsatisfactory, look elsewhere.
The Consumer Financial Protection Bureau (CFPB) suggests asking these questions:
- What services do you offer?
- How is credit counseling offered?
- Do you offer free educational materials?
- What are your fees?
- Are there set-up or monthly fees?
- What if I can’t afford to pay your fees or make contributions?
- Will I have a formal written agreement or contract?
- What are the counselor’s qualifications?
- How are your employees paid?
Get more advice from CFPB at consumerfinance.gov.
The bottom line
Credit counseling is a viable option for borrowers whose financial struggles are manageable. It’s actually a good idea for people who already have a decent handle on their spending. A nonprofit counselor might be able to make some tweaks to help you take your financial situation to the next level and become debt-free.
But it’s not right for everyone. If a lender or collector takes you to court, a Debt Management Plan won’t help. And if you have more than $10,000 in credit card debt, a DMP won’t be your best option. In those instances, take the time to consult another expert before committing to any one strategy.
FAQs
Yes, credit counseling can help you with unsecured debts like credit card debt. A credit counselor will review your monthly bills and figure out the best strategy to tackle multiple bills, whether it is debt consolidation or another strategy.
There are a few key disadvantages. The main one is that you will not be able to have more credit during the counseling process. It also will cost some money, but since you’re usually dealing with nonprofit agencies this will usually be minimal. In addition, it may take longer to pay off some of your debts because you’ll be paying a smaller amount each month.
A reputable credit counseling agency will sent free information about its services without requiring you to provide any specifics about your financial situation. If an agency doesn’t offer to do this, look for help elsewhere.
