Credit counseling: How to choose an organization that’s right for you

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Is your debt controlling you? Credit counseling might help you get out of your financial funk, whether you’re mired in debt from medical bills, major home repairs or student loans. Credit counselors, who work at organizations that offer credit counseling services, review your financial situation by analyzing your household budget, credit reports and consumer debt in order to improve your financial situation.

About one in four U.S. adults indicated they would reach out to a professional nonprofit credit counseling agency for help, according to the 2020 financial literacy survey by the National Foundation for Credit Counseling (NFCC).

Debt issues are generally the main reason consumers contact a credit counselor — specifically individuals who usually have about $10,000 to $15,000 in credit card debt on multiple cards, according to U.S. News and World Report.

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 may help you create a budget and solve money-related issues. It can also design a debt management plan. With a debt management plan, you can lock in lower interest rates with your creditors and get out of debt faster than you would if you simply made monthly payments.

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. 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, it can provide you with the support you need.

You may uncover money problems you never knew you had, come up with a budget for your unique income and expenses and 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 can offer you several types of services, including general budgeting services, debt management plans, bankruptcy counseling, student loan counseling and housing counseling.

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 include an overview of income and expenses and a rundown of your financial goals. You may be able to obtain additional budgeting counseling sessions beyond that one session.

Who it’s best for: People who don’t have a budget or wish to improve their current one so they can live within their means and avoid overspending.

Debt management

A credit counselor creates a plan to consolidate your debts and lower the interest rate. Typically, a credit counselor aims to help you erase the debt over three to five years.

Who it’s best for: People with a significant amount of high-interest credit card debt who would like to consolidate their payments and save on interest.

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.

Who it’s best for: People who have exhausted all other debt relief options and want to pursue bankruptcy to tackle their large debt burdens.

Student loan counseling

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.

Who it’s best for: People with overwhelming amounts of student loan debt that they’d like to pay off sooner rather than later.

Housing counseling

Have some questions about housing as a first-time home buyer? Having trouble paying your rent? No matter the situation, there may be a variety of options available to you through credit counseling.

Who it’s best for: People who have difficulty making rent payments or those who would like guidance to help them buy their first home.

Organizations that offer credit counseling

It’s important to consider the differences between for-profit and nonprofit credit counseling services before choosing a credit counselor.

Nonprofit credit counseling organizations

Credit counseling organizations are usually nonprofit organizations that can give you insight on how to manage your money and debts, according to the Consumer Financial Protection Bureau (CFPB). Nonprofit credit counseling organizations, such as credit unions, usually offer free educational materials and workshops.

An initial counseling session typically lasts an hour. You can also take advantage of follow-up sessions, and the credit counselor may create a debt management plan for you. A debt management plan usually requires you to make a single payment to the credit counseling organization each month or pay period so the credit counseling agency can turn over these monthly payments to your creditors.

For-profit credit counseling services

For-profit debt settlement companies are generally not credit counseling services, and they usually charge a fee for their services. The CFPB lists several risks that you may want to consider before you choose a debt settlement company:

  • 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. You may encounter late fees, penalty interest charges and other fees.
  • Some of your creditors may refuse to work with your settlement agency of choice.
  • Debt settlement companies are often unable to settle all your debts.
  • A creditor might file a debt collection lawsuit against you.
  • Penalties and fees on unsettled debts may wipe out any savings the debt settlement company may be able to get you.

How to get started

All you need to do is take one small step in the right direction: Decide whether credit counseling is right for you.

Are you trying to continue making your house, car and utility payments and pay off credit cards at the same time? Ask yourself how you’ll get a handle on your debt and finances once and for all.

Try to get help as soon as you can, as your credit score may take a hit.  A bad credit score can tell lenders that you’re a high-risk borrower, and they may not extend a loan to you when you want or need it.

Finally, make sure you choose your organization carefully and that it’s accredited so you know you’re working with a legitimate agency and not a debt settlement company.

Written by
Anna Baluch
Contributing writer
Anna Baluch is a personal finance freelance writer from Cleveland who enjoys writing about debt, mortgages, student loans, personal loans and auto financing.
Edited by
Associate loans editor