What is credit counseling?
Credit counseling is designed to help consumers who are struggling to pay back high interest rate credit card debt, as well as other unsecured debt like unpaid medical bills and payday loans. Credit counselors are certified to provide advice on the right way for a consumer to get out of debt in their unique financial situation.
Most credit counseling agencies are nonprofit organizations, because they exist to help consumers rather than generate revenue. They are primarily funded through grants from credit card issuers. The credit card companies fund these programs because they help rehabilitate clients so they can regain credit stability.
How credit counseling works
Credit counseling is a 2-part process.
- Debt and credit evaluation. The first part of the process is entirely free through nonprofit credit counseling agencies.
- A certified credit counselor evaluates your debts, credit and budget to see where you stand
- Based on your total debt, credit score and budget constraints, they see if you qualify for a debt management program and if it would be the most effective solution
- Many counseling associations that certify counseling require that consumers are informed of ALL options, only recommending a debt management program if it’s the best option available
- This is important, because the second thing a credit counseling service does is administer debt management programs
- Managing your debt management plan. If a debt management program is the right solution, the credit counselor helps you enroll and the agency oversees your program
- They find a payment that works for your budget
- Negotiate with creditors to lower interest rates and stop penalties
- Receive your payment each month and distribute it to your creditors as scheduled
Credit counseling and your credit
The impact of a debt and credit evaluation
The initial consultation is completely risk and obligation free. You don’t incur a bill to get an expert opinion on your financial situation and how to solve your challenges with debt. And there’s no obligation to sign up for a debt management program even if that’s what the counselor recommends.
The counselor does check your credit report to make sure all of your debts have been identified and to see where your credit stands. However, since they don’t provide this report to you directly, it’s considered a soft credit inquiry. This has no effect on your credit.
The impact of a debt management program
When executed correctly and completely the credit impact of the debt management side of credit counseling is either neutral or positive – i.e. it will have no effect or it will increase your credit score.
Successfully completing the program eliminates all revolving debt you owe in-full and it counts as a positive payment history because your creditors agree to the program in advance. Since you pay everything you owe, there is no negative affect if the program is completed correctly.
Does credit counseling remove negative credit information?
No. Credit counseling is solely focused on helping you eliminate your debts. They do not make disputes on negative credit report information or do anything involving the credit bureaus and your credit reports. If you need to improve your credit, please visit our Credit Help section.