Credit counseling: What to know before signing up

If you are overwhelmed by debt or feel like your debt is mounting, you’re probably not alone — especially when it comes to credit card debt. Forty-nine percent of credit card holders are carrying a credit card balance from month to month, according to a November 2023 Bankrate survey. That’s up from 39 percent in 2021. Similarly, we’ve seen that the average amount of total household debt in the U.S., including credit card debt, mortgage debt, auto loan debt and more, has risen by $212 billion in Q4 2023 to reach $17.5 trillion, according to the Federal Reserve Bank of New York.

Whether your debt is from credit cards, medical bills, major home repairs, student loans or anything else, a certified credit counselor may be able to help. Credit counselors work at organizations that offer credit counseling services and can assist by reviewing your finances in order to identify steps to help improve your debt situation. That review typically includes steps like analyzing your household budget, credit reports and overall consumer debt.

If you’re considering seeking this type of assistance, you’ll need to understand what exactly credit counseling is, as well as the types of services you can get and where you can get them. Here’s a breakdown of everything you need to know before choosing a credit counseling service.

What is credit counseling?

Credit counseling involves working with an agency that dives deep into your finances and makes recommendations to help you get out of debt. It’s a strategy that can help you take control of your finances and improve your situation.The agency can help you solve money-related issues, either by connecting you with additional resources or by designing specific plans to help you deal with your debt.

How does it work?

If you pursue credit counseling, you’ll meet with a credit counselor for an initial counseling session and share some basic details about your financial situation. These may include your income, current debts and monthly expenses.

Once they know where you stand financially, the counselor will likely suggest a debt management plan or an alternative option. With a debt management plan (DMP), you can lock in lower interest rates with your creditors and get out of debt faster than you would if you simply made minimum monthly payments. They may also help you design a budget and point you toward money management education and other resources.

Why should I apply?

There are a number of reasons you may want to apply for credit counseling. If you’re overwhelmed with debt and want to improve your financial situation, credit counseling can provide the support you need.

You may uncover money problems you never knew you had, allowing you and your counselor to come up with a suitable budget that will help you pay off debt sooner than you’d be able to on your own. If you opt for a debt management plan, you could also save thousands of dollars in interest.

Types of credit counseling services

Credit counseling organizations offer several types of services, including the following:

General budgeting

A credit counselor can help you through general budgeting techniques. Your credit counselor will often offer a free initial session, typically an hour long, which will include an overview of your financial goals and current financial practices. Budgeting conversations will also include going over your income and expenses. You may be able to obtain additional budgeting counseling sessions beyond that one session.

Debt management

A credit counselor creates a plan to consolidate your debts and lower the interest rate, typically by calling your creditors and negotiating with them on your behalf. Once negotiations are done, your credit counseling agency will tell you how much you’ll need to pay monthly to pay down your debt. So, instead of making multiple bill payments toward different creditors each month, you’ll make one bill payment each month to your credit counseling agency, which will then distribute your payment to your creditors on your behalf.

Typically, a credit counselor will create a DMP with the aim to help you erase the debt over three to five years.

Bankruptcy counseling

Bankruptcy is a legal proceeding filed in the United States Bankruptcy Court that allows you to obtain a discharge of your obligation to pay certain debts. Bankruptcy counseling gives you two financial education sessions: one before you file for bankruptcy and another when your debts are discharged.

Student loan counseling

If you are having trouble repaying your student loans, you might look to a credit counselor for information on repayment options. A counselor may help you have conversations with your student loan issuers to reduce your interest rates or consolidate your loans if it makes sense to do so.

Housing counseling

If you’re having trouble paying your mortgage or your rent, you may be able to find the help you need after getting housing counseling. Certain counselors can help you avoid foreclosure, while others can be there to just answer questions you might have about buying a home. No matter the situation, there may be a variety of options available to you through credit counseling.

Organizations that offer credit counseling

Credit counseling services are typically offered by two types of entities: nonprofit organizations and for-profit debt settlement companies. Let’s break down the differences between the two to see which is usually recommended.

Nonprofit credit counseling organizations

These organizations employ certified counselors who have extensive training in debt management, particularly when it comes to the consumer credit industry.  These organizations  can give you insight on how to manage your money and debts, and they will usually offer free educational materials and workshops.

An initial counseling session typically lasts an hour and is typically free, although individual credit counselors can sometimes charge a fee for this. You can also take advantage of follow-up sessions, and the credit counselor may create a debt management plan for you.

While this DMP might not include getting your creditors to lower the amount you owe, it will include negotiating with them to make your payments more manageable with lower interest rates and a clear end goal. Keep in mind, however, that some creditors will refuse to work with credit counselors, so it’s best to have your credit counselor set the proper expectations with you before beginning your DMP.

For-profit debt settlement companies

For-profit debt settlement companies are not the same as credit counseling organizations.

When providing a DMP, credit counseling organizations aim to lower interest rates and make payments more manageable month-to-month so that you can pay them off faster, usually with a single monthly payment. Debt settlement companies attempt to negotiate with creditors to forgive all or some of your debt. Then, they’ll put you on a single monthly payment plan depending on the outcome of those negotiations and whether you agree to the terms.

Debt settlement companies usually charge more fees for their services, and those fees are often higher than what you might find at a nonprofit. The Consumer Financial Protection Bureau (CFPB) also lists several risks that you may want to consider before you choose a debt settlement company. These risks include:

• Doing extensive damage to your credit score: A debt settlement company may prefer that you stop paying your credit card bills during the negotiation process, which could ultimately damage your credit score.
• Being responsible for more fees: From your creditors, you may encounter late fees, penalty interest charges and other fees once you stop paying your bills. The debt settlement company will also charge you fees.
• Having issues with the debt settlement process: Some of your creditors may refuse to work with your settlement agency of choice.
• Dealing with continued debt after the debt settlement process: Debt settlement companies are often unable to settle all your debts. This is in part because some creditors have rules about how much debt they can forgive, and those rules won’t change just because a debt settlement company approaches them.
• Having legal issues with creditors: A creditor might file a debt collection lawsuit against you.
• Not being able to actually save money: Penalties and fees on unsettled debts may wipe out any savings the debt settlement company is able to get you.

How to get started with credit counseling

If you’ve decided that credit counseling is right for you, then it’s time to make a plan. You can start by gathering up all of the information you have on your finances to better prepare for your meeting with a counselor. This will include making note of:

• Every type of debt you owe and how much you owe
• Which creditors you owe and whether you’ve tried to negotiate with them on your own before
• Your monthly income
• How much you typically spend in a month

Next, you’ll want to find a certified credit counselor from an accredited nonprofit credit counseling organization. You can search the databases from the National Foundation for Credit Counseling and the Financial Counseling Association of America for more information about counselors in your area. For those looking for housing counseling specifically, a good place to start might also be with a counseling agency sponsored by the U.S. Department of Urban Housing and Development.

The bottom line

Are you trying to continue making your house, car and utility payments and pay off credit cards at the same time? Maybe you need help getting a handle on your debt and finances once and for all. A credit counselor can be there to offer the guidance, resources and support you need to get your debt under control.

If you think credit counseling is right for you, try to get help as soon as you can to avoid extensive damage to your credit score. A bad credit score can tell lenders that you’re a high-risk borrower, and they may not extend a loan or a new credit card to you when you want or need it if you take too long to complete your credit counseling process.

Finally, make sure you choose your credit counseling organization carefully. Instead of hiring a debt settlement company, you should start by working with a certified counselor from an accredited nonprofit agency that can steer you in the right direction.