What Is Credit Counseling?
Credit counseling can be a free or low-cost way out of debt. Most services are provided by nonprofit agencies.
In your first session, a counselor reviews your budget and debts and helps you build a plan to get back on track. In some cases, the agencies may recommend a debt management plan. A debt management plan can help you get out of credit card debt in two to five years but often comes with modest fees that can vary by state.
Here’s what to know about credit counseling and when it may be time to consider making an appointment.
- You could get professional budgeting help for free by meeting with a credit counselor.
- At a modest cost, credit counselors can also help you with a debt management plan. These can get you out of credit card and personal loan debt within a few years, typically.
- Credit counseling doesn’t impact credit scores, but debt management plans can, indirectly. A debt management plan may hurt credit when you first enroll. However, many borrowers see a boost over time.
What is credit counseling?
Credit counseling is a service that can help you better manage your money. Professionals (credit counselors) conduct workshops, provide learning materials and can enroll you in a formal debt management plan (more on that below), if necessary.
Credit counselors are trained to get to the root of your financial situation. For instance, a credit counselor can help you create a budget or find room to pay off debt.
Credit counseling is required for bankruptcy — you must complete a session within 180 days before filing. But bankruptcy isn’t required to get credit counseling. For many, credit counseling is a solution that can help them avoid filing.
Even though credit counseling is typically nonprofit, that doesn’t mean that it’s always free. Some benefits may be free, like one-on-one budgeting or workshop opportunities. Debt management plans, however, usually have a modest cost attached.
How does credit counseling work?
How your credit counseling experience works depends on the organization you choose and your financial situation.
Typically, credit counselors offer a free initial consultation to go over your finances and come up with a personalized action plan. The consultation could happen over the phone, online or in-person, and it may last about an hour.
During that first session, your counselor may determine that 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 with your creditors to get your debt — typically credit card debt — paid off within two 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.
You usually need to close whatever credit cards you enroll in your DMP, although you may be able to keep one for emergencies. You’ll also have to keep up with payments or you could void the deal your credit counselor was able to secure for you.
How much does credit counseling cost?
Because many consumer credit counseling organizations are nonprofits, they generally charge no or low fees. But how much credit counseling costs depends on the services you need, the state you live in, your current finances and the agency you choose.
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.
Typical credit counseling costs
| Item | Cost |
|---|---|
| Initial meeting | $0 (often free) |
| Budget/personal finance advice | $0 (often free) |
| Educational materials | $0 (often free) |
| One-time DMP enrollment/set-up fee | Commonly $0-$79 (varies) |
| Monthly DMP fee | Commonly $20-$79 (varies) |
DMP fees can be waived for those who are filing for bankruptcy and demonstrate financial need. DMP fees can also be capped at the state level, and cannot exceed $79 a month according to federal law.
It’s important to ask for a fee breakdown when considering a credit counseling service, as it can help you spot scams.
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
- You can pay off your debt within two to five years
- Credit counseling shouldn’t hurt your credit score (but a DMP initially can)
- Credit counselor can advocate for lower interest, waived fees and decreased monthly payments
Cons
- May come with a startup fee as well as monthly fees
- You’ll have to close credit cards enrolled in a debt management plan
- If you miss a debt management plan payment, you could lose your benefits
Does credit counseling hurt your credit?
Credit counseling itself does not directly affect your credit score. Credit counseling can help your credit if you unlearn bad financial habits and create new ones. However, enrolling in a DMP can hurt your credit. At least, temporarily.
How a DMP can hurt your credit
When you enroll in a DMP, you will be required to close credit cards. This may shorten your length of credit history and impact your credit mix (or how many types of credit products you have in your name). Each of these factors generally account for 15% and 10% of your FICO Score, respectively.
Your lender may also report to the credit bureaus that you’re on a DMP. This may then show up on your credit reports. This isn’t a credit scoring factor, but it will let future lenders know that you couldn’t keep up with payments as they were written in your original agreement.
How a DMP can help your credit
As you make on-time payments on your DMP, you should see your credit score tick back up.
Payment history makes up 35% of your FICO Score, the largest share. The National Foundation for Credit Counseling says some clients see credit score increases of up to 100 points over the course of a DMP, often within three years.
Your credit utilization ratio will also decrease as you pay off your debt, and lower is generally better.
Credit utilization measures how much revolving credit you have available compared to how much you’re currently using. It’s part of FICO’s “amounts owed” credit scoring factor, which contributes 30% to your overall score.
Ask LendingTree: How to find a credit counselor
When you seek out credit counseling services, unfortunately, you run the risk of being scammed.
We asked Amanda Push, LendingTree deputy editor and certified financial health counselor, how someone can tell if a credit counseling agency is trustworthy and not a scam.
There are plenty of bad players looking to take advantage of people in desperate situations. Credit counseling can be a great way to get on the road to debt recovery, but you’ll want to do your homework before signing up with an organization.
Make sure an organization is legit by checking with the IRS to see if the agency is a nonprofit. The Department of Justice also maintains a list of credit counseling agencies.
You can also search databases maintained by legitimate credit counseling sources like:
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 debt relief options. They may be a good fit depending on factors such as your credit score and how much debt you have.
Debt consolidation
Debt consolidation may be best for those who’ve improved their credit since borrowing, have good credit and/or are juggling multiple credit card and personal loan bills.
Debt consolidation is the act of using one loan (a debt consolidation loan) to pay off multiple debts. These types of personal loans generally have fixed interest rates, repayment terms and monthly payments.
Debt consolidation 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.
To learn more, read “Credit Counseling vs. Debt Consolidation: Which Is Right for You?”
Debt settlement
Debt settlement may be best for those who are unable to pay back what they owe, already have bad credit and/or don’t want to file for bankruptcy.
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. Settled debts can stay on your credit reports for years. You may also have to pay taxes on any debt that’s dismissed if the Internal Revenue Service considers this income.
To learn more, read “Debt Consolidation vs. Debt Settlement: Weigh Your Options.”
Bankruptcy
Bankruptcy may be best for those who are overwhelmed with debt and/or facing repossession or foreclosure, with no feasible way out.
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 help you reset your finances and begin rebuilding your credit.
There are two common forms of consumer bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy may require you to liquidate some of your assets. With Chapter 13 bankruptcy, you typically won’t lose your property, but you will have to follow a three- to five-year payment plan.
To learn more, read “Understanding Bankruptcy: What To Know Before You File.”
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, but your creditors must agree not to as part of your plan. If the court order (or judgement) has already been approved by the courts, then your wages may be garnished.
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