What is credit counseling and how does it work?

There’s always a chance that financial plans could fail and debt or risk of bankruptcy may rise. If that happens, one possible option to get your finances back on track is to seek credit counseling. 

Here’s what you need to know about credit counseling and why it may be a potential option if you’re struggling financially.

Key takeaways

• Credit counseling services advise borrowers about money, debts, budgeting and more.
• Credit counselors often have specialized training around debt, credit and money management. 
• Some credit counselors can help arrange debt management plans with lenders to extend repayment periods, lower interest rates and waive fees.
• Credit counseling services are different from debt settlement companies.

Credit counseling companies are typically nonprofit groups that can offer advice and assistance to people who need help managing money. According to the Consumer Financial Protection Bureau (CFPB), the counselors at these organizations are “certified and trained in the areas of consumer credit, money and debt management, and budgeting.”

Using that expertise, a credit counselor might offer services that range from personalized budgets to general education classes. Some counselors might even be able to organize debt management plans to help people pay down debts.

Just because a credit counseling service is nonprofit doesn’t mean it offers free services. But according to the CFPB, “a reputable credit counseling organization should be willing to send you free information about itself” and its services. The agency says counseling services that don’t might be worth avoiding.

Credit counseling varies from agency to agency. But typically, it begins with about an hourlong meeting. Depending on the credit counselor, that meeting could be at an office, over the phone or via the internet. 

During an initial meeting, counselors learn more about a person’s financial situation. They might ask in-depth questions about finances to help develop a budget and create a personalized debt plan. Depending on the person, the counselors might offer additional help in a few forms:

• Follow-up sessions
• Free learning materials
• Free workshops
• Debt management plans

What are debt management plans?

With a typical debt management plan, the credit counselor negotiates directly with lenders to try to lower their client’s overall monthly payment. The CFPB explains:

“Under a debt management plan, you make a single payment to the credit counseling organization each month or pay period and the credit counseling organization makes monthly payments to each of your creditors.”

Credit counselors don’t lower payments by negotiating amounts. Instead, they focus on providing a longer time to pay at lower rates without fees.

Like credit counselors, debt settlement companies also negotiate with lenders to help their clients manage their debts. However, there are some significant differences between the two types of companies and how they operate.

Debt-management strategies

Counselors and settlement companies also differ in their approach to debt management. While credit counselors develop a custom plan to help lower your monthly payment, debt settlement companies aim to settle your debt in one lump sum. 

Typically, debt settlement companies advise people to stop making payments to creditors. The CFPB says to be cautious about those kinds of instructions and the companies giving them. Doing so could have a number of negative effects, including:

• Damaged credit
• Debt collections
• Additional late fees and interest charges
• Lawsuits

The CFPB also warns about debt settlement companies that make guarantees about how much they can save you or how quickly they can accomplish it. It’s also important to note that no company is going to be able to erase all of a person’s debts.

There are a few resources you can use if you are interested in credit counseling: 

• Visit the National Foundation for Credit Counseling online or call 800-388-2227.
• Visit the Financial Counseling Association of America online or call 800-450-1794.
• If you find a credit counseling company that’s a good fit, the CFPB says to look it up with your state’s attorney general or consumer protection agency. 

Doing a little research upfront might take a little extra time, but it could help you avoid bigger trouble, including problematic debt settlement companies. Remember, if a credit company refuses to offer free information about its services, it may be best to find another counselor. It also might be wise to avoid any that push a single plan as your only or best option before your finances have been reviewed.

Credit counseling won’t cure financial troubles overnight. Eliminating debt takes work, and successful credit counseling might involve meeting with a credit counselor several times and agreeing to make the necessary changes.

While credit counseling agencies can help you develop a plan to pay off your debts, they aren’t your only resource. Learn more about all other debt relief options. And if you’re looking for ways to consolidate your debt, a balance transfer credit card might be one option.