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What is credit counseling?

A counselor can help you pay off debt and better manage your money

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With rising interest rates and economic uncertainty, many households are struggling to pay their bills. According to the U.S. Census Bureau’s March 2023 Household Pulse Survey, 63% of American households are having some degree of difficulty paying for their usual household expenses.

When debt becomes overwhelming, a credit counselor could be an option. Nonprofit credit counseling agencies offer advice to people who need help managing their money and paying off debt. Learn how credit counseling works, what it costs and how to find a credit counselor that's legitimate.

Key insights

  • Credit counseling agencies help consumers regain control of their finances.
  • A debt management plan consolidates debt into one payment and may reduce or eliminate fees and interest charges.
  • Nonprofit credit counseling agencies provide services for free or at a nominal cost.

How credit counseling works

Credit counseling is a private session between you and a counselor to discuss your financial situation and goals. During this session, you'll review your income, expenses, debt, credit report and other topics. The counselor advises you on how to manage your money and helps to create a plan to tackle your debt. They'll also offer free educational materials so you can learn more about money topics.

"Credit counseling involves working with a counselor to create a budget and develop a plan to pay off your debts,” explained Levon Galstyan, a certified public accountant at Oak View Law Group. “Counselors can teach you better money management skills and may help negotiate with your creditors."

Credit counselors educate consumers on how to negotiate debts and create payment plans. In some cases, they'll reach agreements with your creditors to repay your debts without late fees or going into collections.

According to the National Foundation for Credit Counseling (NFCC), a nonprofit with over 1,000 certified credit counselors, 73% of consumers it works with are able to pay back their debt.

Credit counseling vs. debt settlement

A credit counseling agency is typically a nonprofit organization whose mission is to help people improve their finances. While they may offer services to help you overcome your debt, they are not a debt settlement company.

Debt settlement companies are usually for-profit businesses that charge a fee to negotiate your debts. Some debt settlement companies advise consumers to stop making payments to pressure creditors into more favorable negotiations. However, this can result in late fees, penalty interest rates and negative marks on your credit report.

» MORE: Debt settlement vs. debt consolidation

Credit counseling services

There are many different services available at a credit counseling agency. Here is a sample of the services you can benefit from when working with a credit counselor:

Review your current income and expenses to determine how much money you have to pay down debt. The counselor also highlights areas where you can free up additional cash to build savings and reduce monthly obligations.
Learn what each item means on your credit report and how it affects your credit score. Get guidance on what steps you can take to improve your score in the short and long term.
Analyze your debts and create an action plan to pay them off. Identify debts that are impacting your credit score and which debts have the highest interest rates.

With a debt management plan (DMP), you pay a lump sum to the agency, which then sends the money to your creditors. The credit counseling agency does not take any fees, and 100% of the amount you pay goes to your creditors. Credit counselors may be able to stop collection calls and reduce or waive finance charges and fees on your account.

Discuss whether you're a good candidate for filing bankruptcy. Learn what each type of bankruptcy is and how they affect your debts.

Credit counseling costs

The costs for credit counseling vary widely depending on which agency you work with and which services you need. Nonprofit credit counseling agencies are not trying to make a profit, so they can offer many services for free or at a low cost. They often get funding from other sources, like donations and government grants, which also helps to reduce their costs.

Whether your credit counseling agency is nonprofit or for-profit, they generally offer an initial counseling session for free. All agencies certified by the NFCC offer free credit counseling sessions.

If you need a DMP, you may be asked to pay an initial fee plus a monthly fee for as long as you're in your plan. The Uniform Debt Management Services Act caps debt management fees at $79 per month, but state laws may have lower limits. For example, Consolidated Credit clients pay an average of $40 per month.

For-profit companies are bound by the same $79-per-month limit for debt management plans. However, they may try to hit you with other fees and services to get around those rules.

How to find a credit counselor

Many qualified credit counselors are available through the NFCC. Or, if you know someone who has had financial difficulties, ask them who they worked with. Community and religious organizations may also have local recommendations for legitimate credit counseling agencies.

Scams are prevalent in the credit counseling industry. Be wary of organizations that charge hundreds or thousands of dollars for the same services that many nonprofits or legitimate for-profit agencies offer. If a counselor asks for a big payment upfront, seek a different counselor immediately.

When comparing credit counselors, consider these factors before signing up:

  • Accreditation. Being accredited means the agency has been reviewed by an industry organization that holds them to high standards. You are less likely to be scammed if the company is accredited.
  • Specialties. Does the credit counselor have experience or certifications in the areas where you need the most help? While a general credit counselor can be good, having someone that specializes in situations like yours can accelerate your progress.
  • Fees. How much does the agency charge? What happens if you can't afford to pay or if your job situation changes?
  • Other services provided. Does the counseling agency offer other services that can help you reach your goals faster? Many consumers need additional education to learn how to manage their money and save for their future.
  • In-person vs. online. Will you meet with the agency online or in person? Online services make it easier to fit credit counseling in your schedule, but many consumers prefer meeting in person with their counselor.
  • Hours available. Do their operating hours coincide with your schedule? Are they available in the evening or on weekends to avoid missing work or in case you have questions?

» MORE: How to choose a certified credit counselor

How to prepare for your credit counseling session

After your credit counseling session is booked, you need to prepare for your meeting to get the most out of it. You'll need to bring certain documents, and it helps to have written goals or a purpose for the meeting.

Here’s what you’ll want to have ready:

  • Recent paycheck stubs: Gathering your paycheck stubs from the last two months helps counselors understand your income.
  • Household budget: If you don't already have a budget, make a list of your expenses (utilities, insurance, food, etc.) so it is easier to estimate your monthly obligations.
  • List of current debt: Bring copies of recent statements for all bills, including credit cards, auto loans, mortgages, personal loans and others.
  • Credit report: Obtain your credit report for free from AnnualCreditReport.com. This ensures that no debts are missed and your counselor gets a complete picture of your debt situation.
  • Bank account and investment statements: These accounts highlight how your money is being used and may provide resources to eliminate debt.
  • Financial goals: Think about what your financial goals are in the short term and long term. Once your debt is paid off, what else do you want your money to do for you?
  • Questions: What questions do you have for the counselor? Ask them about the fees, how long it will take, what other services they provide and other concerns you may have.

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    Will going to a credit counselor affect your credit score?

    Your credit score will not suffer just from speaking to or working with a credit counselor. However, a DMP may affect your credit score, depending on payment arrangements. Even so, the purpose of credit counseling is to improve your financial situation, so while a payment plan may cause an initial dip in your score, improved habits will bring it back up in the long run.

    Is credit counseling the same as credit repair?

    No, these are two different services. Credit counselors may discuss your credit report and provide tips for improving your score, but their primary focus is to help you manage your budget and get on track to pay off your debt. Credit repair companies solely focus on your credit and attempt to remove negative items from your credit report.

    Can credit counselors reduce your debt?

    Credit counselors negotiate agreements between consumers and creditors to create a debt payoff plan. This may involve lowering interest rates, waiving fees and adjusting your monthly payment amount. Through a debt management plan, you pay the credit counseling agency, which distributes the money to creditors according to an agreed-upon plan.

    What’s the difference between a debt management plan and debt settlement?

    A debt management plan is a repayment plan that is agreed to by creditors and consumers ahead of time. You make one payment to the credit counselor, who then pays your creditors according to the plan. Debt settlement is the act of negotiating your debts to repay less than you owe. In some cases, a debt settlement company may advise you to stop making payments and avoid talking to creditors to force them to negotiate.

    Bottom line

    Working with credit counseling services is a good way to pay off debt and achieve your goals. Counselors can work with creditors to create a debt management plan to pay off your debt. And since many credit counseling services are free or low-cost, you can reach your goals without paying huge fees.

    But finding the right credit counseling agency is key. Look for one that works with clients in the same situation and has additional services to continue your education. Speak with neighbors, your church or community organizations to get a referral. Otherwise, you can find a nonprofit counselor through the National Foundation for Credit Counseling.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Consumer Financial Protection Bureau, "What is credit counseling?" Accessed March 23, 2023.
    2. U.S. Census Bureau, “Week 55 Household Pulse Survey: March 1 - March 13.” Accessed April 11, 2023.
    3. Consumer Financial Protection Bureau, "What's the difference between a credit counselor and a debt settlement or debt relief company?" Accessed March 23, 2023.
    4. National Foundation for Credit Counseling, "Who benefits?" Accessed March 24, 2023.
    5. National Foundation for Credit Counseling, "How We Help." Accessed March 24, 2023.
    6. National Foundation for Credit Counseling, "What is a Debt Management Plan, and How Does it Help?" Accessed March 24, 2023.
    7. Clearpoint, "How Much Does Credit Counseling Cost? (Hint: It’s Free)." Accessed March 24, 2023.
    8. Consolidated Credit, "Using a Debt Management Program." Accessed March 24, 2023.
    9. GreenPath, "Debt Management Plans." Accessed March 24, 2023.
    10. Equifax, “What Is Credit Counseling and How Can It Help?” Accessed April 11, 2023.
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