What you need to know about credit counseling
Read, 10 minutes
KEY TAKEAWAYS
- Credit counseling can help you create a plan to pay off credit card debt
- The nonprofit agencies charge no or low fees for their guidance
- Beware of for-profit services promising to reduce your debt and charging for actions you could do yourself
If you’re juggling multiple debts and aren’t sure how to pay them off, struggling to get by on a limited income, or just want financial guidance, a credit counselor may be able to help you create a personalized plan. Here’s what you should know before you get started.
What are credit counseling services?
Credit counselors are certified—and in many states, licensed—nonprofit advisors trained to help you take control of your finances, reduce debt and use credit responsibly. Counselors work with you to review your income, expenses and debts. Depending on your needs, they can help you create a personalized budget, set up a debt management plan or outline a general plan of action for your finances.
The most common reason for seeing a credit counselor is to get help reducing credit card debt. Many counselors also provide general financial education and help with budgeting issues, such as breaking out of a paycheck-to-paycheck cycle. Other services may include:
Managing credit cards
Housing, including buying a first home, making mortgage payments, foreclosure and reverse mortgages
Bankruptcy
Recovering from natural disasters
Repaying student loans
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What is a debt management plan?
A debt management plan is an agreement between you and the credit counseling service to pay off your credit cards. The credit counselors negotiate with your creditors to come up with monthly payments you can afford. Often, creditors will lower interest rates and payments, waive late fees and hold off on debt collection as long as you’re on a debt management plan. In exchange, you make a single monthly payment to the counseling service, which then distributes the money to your creditors. Your payments continue until the debts are paid off, often for four years or longer. During that time, you’ll be required to close all credit card accounts to ensure you don’t take on additional debt. You also may not be able to open new credit cards or get approved for new loans.
How much does credit counseling cost?
Many nonprofit credit counseling agencies charge nothing or very little for an initial consultation. More extensive services, such as a debt management plan, typically have a setup fee and ongoing maintenance fees. The agency should be clear and straightforward about any fees that are required.
How do I choose a credit counselor?
Most reputable credit counseling agencies operate as nonprofit organizations. The counselors are certified and trained in credit, debt management and financial education. In addition to certification, most states require credit counselors to be licensed by a state agency.
Ask what services they offer, what fees you’ll be expected to pay, and how they safeguard your personal information. If a prospective credit counselor can’t answer these questions or puts you ill at ease, keep looking.
To protect yourself from unethical individuals posing as credit counselors, avoid anyone who:
- Can’t confirm that they’re certified or licensed, if required in your state
- Won’t answer basic questions unless you reveal personal details
- Requires money up front
- Promises to make your debt disappear without any work on your part
These government agencies and organizations have guidelines and lists to help you find a reputable credit counselor.
Federal Trade Commission
Consumer Financial Protection Bureau
U.S. Department of Justice
National Foundation for Credit Counseling
Financial Counseling Association of America
Quick tip
Beware of companies advertised as debt relief or debt settlement agencies. These for-profit companies typically charge fees to negotiate a debt reduction settlement with creditors. The Federal Trade Commission warns these programs are risky. There’s a chance you could end up owing more, dealing with debt collectors, and damaging your credit report and credit score.
What can I expect from a session?
Your first session will probably last about an hour. It can be done in person, virtually or on the telephone. Some agencies offer self-guided, online programs. Expect to share information about your income, debts, expenses and use of credit, as well as your short- and long-term goals. If you’re expecting changes to your finances, like a reduction in salary, that’s important, too. The more honest you are, the better the counselor will be able to understand your financial situation and offer strategies for paying off debt and managing credit.
A reputable counselor won’t have a limit. You may need just one session to set up a workable budget. Or if you might benefit from a plan to repay unsecured debt, you might sign up for repeat sessions and pay small, ongoing fees until you pay down the debt. You can talk with a counselor before you sign up to make sure that kind of program will accomplish your goals.
