What Is Credit Counseling?
If not paid off quickly, credit card debt and other liabilities can stack up and become overwhelming. Credit counseling is an option for consumers who find themselves unable to keep up with debt payments and want to avoid bankruptcy. Here’s what you need to know about credit counseling and when it may be time for you to go.
What is credit counseling?
Nonprofits typically offer credit counseling as a service to help you better manage your money. Credit counselors are certified to assist you with tasks such as creating a budget, accessing your credit reports and scores, paying down debt and writing a debt management plan.
Aside from these strategies, credit counselors can also help you get to the root of your financial situation. For instance, if you’re living paycheck to paycheck, a credit counselor can help you assess which areas of your budget can be trimmed.
How does credit counseling work?
How your credit counseling experience works will vary depending on which organization you choose. Typically, credit counselors offer a free initial consultation to go over your finances and choose a strategy depending on the issues you’re facing.
During that credit counseling session, your counselor may also access your credit score and reports, provide free budgeting tools and help you decide on the next steps. This is also the time when your credit counselor may determine whether you would be a good fit for a debt management plan.
What is a debt management plan?
A debt management plan (DMP) is an agreement your credit counselor makes with your creditors to get your debt — typically credit cards — paid off within three to five years. In these instances, your credit counselor can advocate on your behalf to get your interest rates lowered, fees waived or monthly payments decreased to make this plan doable.
While you’re in a DMP, you’ll make monthly payments to your credit counselor, who will then pass the funds on to your creditors. As you pay down your debt and improve your credit utilization ratio, your credit score may get a boost, too.
During this time, you won’t be able to use the credit cards that are part of your debt management plan. You’ll also have to keep up with payments or you could void the benefits your credit counselor was able to secure for you.
How much does a consumer credit counseling service cost?
Because many consumer credit counseling organizations are nonprofits, they generally charge minimal or low fees. Much of the cost of credit counseling, however, depends on the state in which you live.
Typically, credit counselors charge an initial setup fee. After that, you may pay a monthly fee that is likely to be less than $50. If you sign up for a debt management plan, it may cost you extra. In some instances, the organization may waive fees if you’re unable to afford them.
Pros and cons of credit counseling
Credit counseling is a low-cost approach to taking your debt by the horns. But credit counseling may not be the answer for everyone, and it does come with a few downsides that are important to consider.
| Pros | Cons |
|---|---|
| You can pay off your debt within three to five years | May come with a startup fee as well as monthly fees |
| Credit counseling and debt management plans shouldn’t hurt your credit score | You’ll have to close your credit cards if you enroll in a debt management plan |
| Credit counselor can advocate for lower interest, waived fees and decreased monthly payments | If you miss a debt management plan payment, you could lose your benefits |
Does credit counseling hurt your credit?
On the offset, credit counseling doesn’t affect your credit score. As you pay off your debt, however, your credit utilization ratio will decrease, which can help boost your score. Making on-time payments can also help improve your credit score.
On that same note, on the offset, debt management plans also generally don’t affect your credit score. However, your lender may report to the credit bureaus that you’re on a DMP. This may then show up on your credit reports.
It’s also possible that a debt management plan could involve closing some credit card accounts, which could ding your credit score in the shorter term. As you follow your DMP and pay off your debts, your credit score may improve.
How to find a credit counselor
There are several avenues you can use to find a legitimate credit counselor. You can search databases such as the Financial Counseling Association of America and the National Foundation for Credit Counseling. The U.S. Department of Justice also offers a list of approved credit counselors by state.
When you seek out credit counseling services, unfortunately, you run the risk of being scammed. To make sure a credit counseling agency is authentic, you can search your state attorney general office and state consumer protection office.
Alternatives to credit counseling
If you’re in a tight spot financially, credit counseling may help, but it’s not your only option. Consider these alternative choices, which may be a good fit depending on factors such as your credit score and how much debt you have.
Credit counseling vs. debt consolidation: As opposed to working with a credit counselor, debt consolidation is when you go to a lender to combine multiple debts into a single debt consolidation loan. These types of personal loans have fixed interest rates, repayment terms and monthly payments.
This can help you better manage your debt, as you’ll be responsible for one monthly payment instead of multiple payments. You may also be able to get a lower interest rate than what you’re currently paying. This option may be best for those with good credit who can qualify for low interest rates.
Credit counseling vs. debt settlement: Debt settlement is an option for consumers to negotiate with their lender to pay less than what they owe. You can pay a company to do this or you can work with your lender yourself. Keep in mind that your lender is not obligated to settle with you, and you may have to pay your debt off in full.
Debt settlement can affect your credit, unlike credit counseling. Settled debts can stay on your credit reports for up to seven years. You may also have to pay taxes on any debt that’s dismissed if the Internal Revenue Service considers this income.
Credit counseling vs. bankruptcy: As a last resort, you may need to consider filing for bankruptcy if repaying your credit card debt isn’t doable. Bankruptcy can stay on your credit report for up to seven or 10 years — depending on the type of bankruptcy — and can make it difficult to borrow in the future. On the other hand, bankruptcy can give you a clean slate when it comes to credit.
There are two common forms of consumer bankruptcy. Chapter 7 bankruptcy is the most common and may require you to liquidate some of your assets. With Chapter 13 bankruptcy, you won’t lose your property, but you will have to follow a three- to five-year payment plan.
Frequently asked questions
Credit counseling may be worth it if you’re feeling overwhelmed by your credit card debt and want the help of a professional. It may also be a good idea if you’re interested in getting on a debt management plan.
A credit counselor may help you pay off payday loans by coming up with a budget and payment plan. In some cases, they may be able to include your payday loans on a debt management plan.
Your credit counselor may be able to help stop wage garnishment and get you on a debt management plan. As long as you’re making payments, your lender can’t garnish your wages and will need a court order to do so.