Credit Counseling: How it Works & How to Select an Agency (2024)

Credit counseling is designed to help consumers avoid bankruptcy and escape living paycheck-to-paycheck. Credit counselors offer advice on budgeting, managing money and other basics of finance. They assist people unsure of how to approach creditors about a settlement, or a payment plan and walk them through the process.

Certified credit counselors don’t just deal with today’s debt problems, they address its root causes. They’ll do a comprehensive review of a client’s spending and identify things that led consumers to max out their credit cards or fall behind on mortgage or car payments.

Then, they’ll offer clientsadvice on how to break bad financial habits.The solutions to difficulties vary because the situation each consumer presents is unique. Many counselors suggest Debt Management Plans (DMP) as a solution, while others may point you to debt consolidation, debt settlement or bankruptcy.

“When someone meets with a certified credit counselor, they get expert advice for overcoming their most urgent financial challenges,” Bruce McClary, Vice President of Communications at the NFCC said. “Consumers benefit from a comprehensive review of their entire financial situation. Every counseling session is completely confidential with advice that is uniquely designed for each individual.”

In other words, the solution all depends on the circ*mstances of your situation and the resources you have available to eliminate debt.

What Happens in a Credit Counseling Session?

If you’re falling behind on credit card or loan payments, be proactive. Chances are the situation is going to get worse, and the longer you wait to dig out of the hole, the more shoveling you’ll have to do.

Nonprofit counseling organizations offer services online, over the telephone and in person. The first thing they’ll do is conduct a 30-to-40-minute interview, asking questions about your income, expenses, budget, credit card debt, employment status and other financial assets or burdens. You’ll want to have that information handy before starting the interview.

Counselors will ask about the circ*mstances that got you into a financial fix – job changes, divorce and medical bills are common causes. Credit counselors can design money management programs that can help you adjust your budget to your current financial circ*mstances.

Benefits of Credit Counseling

Simply stated, a good credit counselor can help you pay off debts and avoid getting back into a hole. The ultimate payoff isn’t really monetary. It’s peace of mind.

To get to that happy place, here are some specific steps.

• Review yourcredit report:A good credit score is essential to getting a decent interest rate on credit cards and bank loans. Credit counselors will scour your report for inaccuracies that, if corrected, could boost your score.
• General budgeting:Counselors will help identify all your sources of income and debt and design a budget to keep revenue ahead of expenses.
• Debt management plans:Counselors will work with creditors to consolidate your debts into a single monthly payment with a lower interest rate. These plans typically pay off debt in 3-5.
• Bankruptcy counseling:It’s a final option, but it might be the best one. A counselor will help you decide and then guide you through the process.
• Housing counseling:Can you afford to stay where you live? Is renting better than owning? Is it wise to restructure your mortgage? Counselors can help answer these questions and keep a roof over your head.

How to Prepare for Credit Counseling

Getting ready to talk to a counselor is not anyone’s idea of fun, but you should focus on the benefits it could bring. The more prepared you are, the better your chances of devising a successful plan.

Credit counselors will want information on:

• Income–Have your last paycheck for each source of income and make sure it shows your total income, amount withheld and total take home pay.
• Current debts – Be ready with a list of monthly payments, interest rates and loan terms for any mortgages, auto loans, student loans or other loans you might have.
• Credit card information – Organize your credit card information with current balances, interest rates and due dates listed with each card.
• Monthly expenses – Estimate how much money you spend each month on groceries, gas, bills such as utility, internet, cell phone, insurance, subscription services like Netflix and Amazon and anything else you pay for every month.

Selecting a Credit Counseling Agency

Finding areputable credit counseling agencyisn’t different than most shopping ventures. Know whatyou want; seek recommendations from friends who have used the service; and do research online to find out about a company’s practices and history.

As you research companies, there are some standard questions they should answer that will help you identify if they’re the right organization for you.

How to Select a Credit Counseling Agency

Not all credit counseling agencies were created equally. To find the one best for you, there are a lot of things to consider.

• Is the agency licensed in your state and accredited? Members of the National Foundation for Credit Counseling(NFCC) adhere to strict standards and regular audits for data security, counselor accreditation and customer service. Is your counselor a member?
• What services does the agency offer?
• Does the agency offer services online, in person or by telephone?
• Does it offer educational workshops and reading materials?
• Does it provide a contract that includes all fees, services and a time frame to complete the program?
• What happens if you can’t afford the fees or miss a payment?
• What steps does the agency take to prevent identity theft?

And finally, you should contact your state’s attorney general’s office or the Better Business Bureau for records of complaints and how the agency responded.

Best Credit Counseling Services

Credit cards weren’t invented to drive people into debt, but they’ve more than served that purpose for millions of consumers. AnNFCC survey in 2020 found that 62% of people had credit card debt in the previous year and 43% carried it over month after month.

Credit counseling services create personalized plans to get you out of that quicksand. Here are some of the highest-rated companies to consider.

• InCharge Debt Solutions
• Green Path
• American Consumer Credit Counseling
• Money Management International
• Apprisen
• Consolidated Credit
• Cambridge Credit Counseling

For-Profit vs. Nonprofit Credit Counseling

The Federal Trade Commission and the NFCC suggest you work with legitimate nonprofit credit counseling organizations. The nonprofit agencies offer counseling for free or at a minimal charge.

The NFCC, which certifies financial counselors and companies, has approved 57 nonprofit agencies in the United States. On the other hand, there are no for-profit companies that are accredited by the NFCC.

Financial counselors for nonprofits operate under strict state and organizational guidelines to ensure they act in their client’s best interest or they risk losing their status as nonprofits. They are frequently audited by state inspectors.

Some nonprofits offer clients monthly newsletters with money-saving tips and stories of people who’ve gotten out of debt. They conduct community workshops and provide financial calculators that help clients track their progress.

Counselors at for-profit agencies often have incentives to sell products and services. They may have bonuses based on how many people sign up for fee-originating programs. Whether such programs actually suit a client’s needs might not be the primary concern.

Using a non-profit agency doesn’t guarantee you’ll end up a satisfied customer, but your odds are much better.

When You Should Use Credit Counseling

Credit counseling should not be confused with credit repair. In credit repair, a company will look over your credit report and root out false information. Credit counseling offers a more comprehensive plan and added resources.

It’s a go-to option when someone hastoo much debt,but it isn’t used solely by people in financial trouble. Some clients just want counselors to decipher their credit card debt and other bills and help create an affordable budget.

But if you’ve begun missing credit card payments, that’s a glaring sign you need counseling. The earlier you attack the problem, the easier it will be to correct. You might be able to fix your situation with aDIY debt consolidation techniqueif you catch it early enough.

That starts with budgeting and might include credit card refinancing. That involves moving credit card balances to a no-feebalance transfer cardwith an initial 0% interest for an introductory period, usually 12-18 months. It works if you have a qualifying credit score (670 or higher) and your debt amount is low enough that you can pay it off in the introductory period. If you have a lot of debt, you’ll need a more comprehensive strategy.

Either way, a nonprofit credit counselor can point you in the right direction.

Does Credit Counseling Hurt Your Credit Score?

Meeting with a counselor does not impact a person’scredit score.The strategy they advise might cause temporary dips, but you will ultimately come out ahead if you see the plan.

The most common solutions offered are:

• Debt Management Plan. That involves closing some accounts, which will hurt your score temporarily, but the score will improve if you make on-time payments.
• Debt Consolidation Loan. This plan may well improve your score since the loan will be used to pay off revolving high-interest debt.
• Debt Settlement. A counselor negotiates with lenders so you end up paying less than what you owe. However, a “settled” debt could damage your score by 100-200 points and stays on your report for seven years.
• This is usually the last option and only used if financial challenges are insurmountable. A Chapter 13 bankruptcy stays on your report for seven years. A Chapter 7 lingers for 10 years.

How Much Does Credit Counseling Cost?

Many of the services offered by nonprofit counseling organizations are free, including the initial consultation. The fees are charged to cover expenses, if you choose to enroll in a debt management program, which usually has a set-up fee and monthly charge. Those costs vary, but expect to pay $50 to $75 for the set-up and a monthly fee of $25 to $35.

Does Credit Counseling Work?

An NFCC report showed that member agencies counseled 1.2 million consumers in 2017. The agencies reported that nearly 70% of those enrolled in debt management planshad either paid off or were paying off their debt in a 4-5 year window.

The NFCC also started its own credit counseling program called “Sharpen Your Financial Focus” to help people learn how to manage their money more effectively. Ohio State University surveyed participants and found 68% say credit counseling helped them manage their money better and 73% said they are paying their debt more consistently.

Over a year and half, the average participant’scredit scoreimproved 50 points andrevolving debtdropped $8,000.

If the consumer chooses to participate in debt management programs, debt settlement ordebt consolidationallow a 3- to 5-year window to complete the program. If you expect it to take longer than that to settle your debt, it may be wise to file bankruptcy.

Asking for credit counseling has no effect on your credit score. However, participating in one of the programs will have an effect.

Lenders can make a note in your credit history that their account is being paid through a DMP, which won’t affect your score as long as the account is up to date and eventually gets paid in full.

If you choosedebt settlement,the lender will report the debt as settled for less than what was owed and that almost always has a negative impact on your credit score

Getting Started with a Credit Counselor

Being in debt isn’t just a financial problem. The strain of constantly owing money can disrupt your entire life.

Credit counseling is not a magic wand that allows you to wave your troubles away. But it does offer tools for debt help and the knowledge to use them.

What’s more, contacting a credit counseling agency is a no-risk proposition. You can take it or leave it.

The only thing you might lose is a lot of debt.