What is credit counseling?

Consumer credit counseling services help overextended credit users eliminate high interest rate credit card debt to regain financial stability. Certified credit counselors evaluate your debts, budget and credit to help you identify the best way to get out of debt in your situation.

If you can’t eliminate debt on your own, they can also help you enroll in a debt management program. In this case, the credit counseling agency acts as a go-between for you and your creditors. They set up a repayment plan that everyone can agree on, then they negotiate to reduce or eliminate interest charges.

These services are also called debt counseling and financial counseling. The terms are roughly interchangeable.

Types of counseling services

There are two types of credit counseling – for-profit and nonprofit. The difference between these two services is how they earn revenue. For-profit counseling agencies earn revenue through fees, so these plans tend to be more expensive for the credit user.

By contrast, nonprofit agencies are supported through grant money from major credit issuers. Creditors provide grants so nonprofit counselors can help their customers repay their debt effectively. This means lower fees for the credit user. In fact, nonprofit agencies offer debt evaluation entirely for free. They only apply fees to set up and administer a debt management program.

For most people who are struggling with debt, nonprofit credit counseling is the better option. You have lower out-of-pocket costs, which is useful as you work to pay off your debt. That last thing you usually need is a big bill. If you’re looking for nonprofit counseling services, fill out the form you see at the top of this page. Debt.com only refers you to the best accredited nonprofit consumer credit counseling services.

How credit counseling works – the nonprofit version

Step 1: Free evaluation

One of the problems many people encounter when they first run into debt problems is lack of knowledge about solutions. Until you get into debt, you don’t know all the options available to get out of it.

Certified credit counselors know the full spectrum of debt solutions available. So, they can help you assess which one is right to use your unique financial situation. Counseling sessions are usually done over the phone.

  1. To start the process, the credit counselor will ask for some basic financial information. This includes:
    1. Your income
    2. Current debts, including secured debts like your mortgage or auto loan
    3. Monthly expenses – i.e. groceries, gas, entertainment, subscriptions… everything in your budget
    4. Current balances on your credit cards, as well as the APR on each account
    5. Other obligations, such as payday loans and unpaid medical bills
  2. You also authorize the counselor to run a credit check. This allows them to review your report to see if you have collections or other items of note. This is a “soft” credit inquiry, so it does not impact your credit score.
  3. Once they have a good picture of your financial situation, the counselor makes recommendations for debt relief. This can include:
    1. Balance transfers
    2. Consolidation loans
    3. Debt management programs
    4. Settlement offers
  4. Nonprofit counselors are required to review ALL your options and recommend only the best solutions for your situation. In other words, nonprofit agencies don’t try to “sell” you on their program.

This makes counseling the best way to find the right solution for your needs. You can get an impartial, expert opinion about what you need to do to get out of debt. You can ask questions about different solutions and learn how to minimize things like credit damage.

Step 2: Debt management program enrollment

Both for-profit and nonprofit agencies can help you enroll in a debt management program. Nonprofit organizations only recommend this if it’s the best option to use in your situation; otherwise, they tell you where to go.

If it turns out that a DMP is the right solution, you can enroll in the program through the same nonprofit agency that evaluated you in Step 1. Here’s what you can expect and what you need to know about the role your credit counselor plays:

  1. First the counselor asks which debts you want included in the program. Enrollment is 100% voluntary, so there’s no requirement to include all your accounts.
    1. Most counselors will recommend that you include everything you can, so you eliminate all your revolving debt.
    2. However, many people decide to leave one card out of the program for emergency situations; if you decide to include that account later, you can talk to your counselor to add it to your program.
  2. You and your counselor determine the monthly payment you can afford to make for your DMP.
  3. The counseling team then works with your creditors to prioritize your debts for repayment; each creditor must sign off on the program for that debt to be included.
  4. Your counselor will also negotiate with your creditor to:
    1. Reduce or eliminate the APR applied to your debt
    2. Waive future penalties and late fees
  5. Once all your creditors agree, you sign some paperwork and your program starts.

Step 3: Your counselor’s role during enrollment

  1. Each month, you pay one payment to the credit counseling agency on all your debts included in the program; they distribute the money to your creditors as agreed.
  2. During your enrollment, the credit counselors will also help you create a balanced budget. This allows you to live without any dependence on credit cards. Be aware that any account you include is frozen at the start of your program.
  3. They also provide free resources you can use to build your financial literacy level; this helps you learn how to avoid debt problems in the future and plan for long-term financial stability.
  4. If you run into trouble during your program, you can talk to the counseling team to make special arrangements.

The idea is that the counseling team helps you become a better money manager that’s more effective at managing debt. That way, once you get out of debt, you can stay that way.

What certified credit counseling can and can’t do for you

What it can do

  1. Answer questions about various options for debt relief
  2. Assist you in identifying the right debt solutions for your needs
  3. Help you eliminate your existing credit card debt
    1. This also includes other unsecured debts, such as unpaid medical bills and payday loans
  4. Eliminate the hassle of collection calls. Once you enroll, you can pick up the phone and tell them you’re working with an agency. Collectors must then go through the agency about your debts.
  5. Provide resources to build financial literacy
  6. Teach you how to budget and manage debt effectively
  7. Help you establish long-term financial stability

What it can’t do

  1. Repair your credit (that’s a different service)
  2. Provide immediate debt elimination – debt management programs take about 36 to 60 payments, on average.
  3. Settle your debt for less than you owe; they can direct you to debt settlement services, but they can’t help you enroll in a settlement program.
  4. Provide direct assistance for other types of debt – mortgage, tax debt or student loans; however, they can refer you to other service providers.
  5. Stop existing court actions regarding your debt – if a collector already sued you and won, the ruling stands.

The best situation to use credit counseling

Enrolling in a debt management program through a credit counseling agency is not a magic cure-all. It won’t work in every situation for every type of debt. Even when it comes to unsecured debt, you need a specific set of circumstances for this to work. Those circumstances are pretty broad, but they don’t apply to everyone.

  1. You must have at least $5,000 in unsecured debt to repay – any lower amount would use a DIY solution.
  2. You must have at least some income or means to make a reduced monthly payment. This means if you’re unemployed and can’t make any monthly payment, this won’t work.
  3. Most of your debts need to be with the original credit issuer. In other words, if all your debts are charged-off, you may be better off with settlement. Although you may be able to include debts in collections in your DMP, collectors are less likely than major creditors to sign off on the program.
  4. The bulk of your debt problems need to be rooted in credit cards. So, for instance, if most of your debts are unpaid medical bills, you don’t get any benefit from interest rate negotiation. In this case, the better option is to work out repayment plans or settlements with individual service providers.

Credit score and financing concerns

Credit score is not a factor with credit counseling. The initial consultation, even with a credit check, won’t affect your score. There is no minimum score requirement to enroll in a debt management program. In addition, when executed correctly the program has either a neutral or positive effect on your credit. In other words, if you still have good or excellent credit, this program won’t set you back.

It’s also worth noting that working with debt counselors doesn’t negatively impact your ability to qualify for new financing. Even if you enroll in a debt management program, you can still get approved for loans, such as a mortgage or an auto loan. You can’t open new credit accounts during enrollment. However, you can get approved for major financing to purchase a home or car or to fund a higher education. This way, you don’t have to put your life on hold while you pay off your credit card debt.

How to spot a nonprofit credit counseling scam

  1. They charge upfront fees before they perform any actual service – this is how you spot any debt relief scam, even for settlement. According to federal regulations, companies cannot charge a client fees until they provide some form of actual debt relief.
  2. They guarantee to improve your credit score by a certain number. Although data shows successfully completing a debt management program can improve people’s scores, there is no guarantee. Results vary based on where you started when you enrolled and what negative penalties you incurred prior to enrollment.
  3. They tell you to do something illegal. A certified credit counselor will never tell you to try and create a new identity to get away from your old debt. Companies that advise people to get new Social Security or Employer Identification Numbers (EINs) are scams! Credit counselors won’t even advise that you run or hide from creditors or collectors; they help you find ways to face your challenges directly.
  4. They try to drive you into signing up for a specific solution. Nonprofit agencies must advise a client of ALL their options and only recommend the best solution. If an agency pushes you to enroll in their debt management program or recommends a different program, it’s not a nonprofit organization.

Is there any advantage with for-profit counseling services?

This really depends on the agency you work with and what they offer. In some cases, a company pairs credit counseling and credit repair. To do this legally, that means that they have both certified credit counselors and state-licensed credit repair attorneys on staff. In this case, they help you eliminate your debt, and then help you dispute any lingering mistakes in your report.

Other for-profit agencies may continue to work with you to improve your financial outlook. These agencies trend more towards financial counseling, rather than just credit or debt counseling. They add components of financial planning into the mix, which help you build better long-term strategies.

However, outside of these types of package services, there is little difference with the actual debt management service provided. If money is already tight and you can’t afford the bills you have now, there’s little reason to add another. You’re usually better off going through a nonprofit agency in order to keep fees low and ensure your plan is affordable.