Credit Counseling: What It Is, How It Works

NP
By Nathan Paulus
Edited by Casie McCoskey

Updated: October 31, 2024

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A credit counselor discusses financial matters with a young couple, pointing to information on a laptop screen.

If financial stress is keeping you up at night — whether it's overdue bills, rising interest rates or not knowing how to budget effectively — credit counseling might be the support you need. Unlike one-size-fits-all solutions, credit counseling pairs you with a trained professional who can evaluate your specific financial situation and create a tailored strategy to regain control.

Learning about how credit counseling works and its benefits and drawbacks can help you determine if it's the right solution for your financial situation. We'll also take you through the steps of finding the right credit counselor and what to do before your first session.

Credit Counseling: Key Takeaways

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Credit counseling offers personalized advice for those overwhelmed by debt or needing help with long-term financial planning.

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A debt management plan (DMP) consolidates multiple debts into one monthly payment, often with reduced interest rates or fees.

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It may be time to seek help from a credit counselor if you’re struggling to make minimum payments, dealing with aggressive debt collection or considering bankruptcy.

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Before committing to a credit counseling agency, ask about services, fees and qualifications to ensure you choose the right professional for your needs.

What Is Credit Counseling?

Credit counseling is a service designed to assist individuals and families facing financial challenges, particularly those struggling with debt. The goal is to offer personalized advice on budgeting, paying off debt and building better financial habits before the situation worsens.

Credit counseling is typically offered by nonprofit organizations, though some for-profit agencies also provide similar services. These nonprofit agencies are often accredited by reputable bodies such as the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). If you choose to participate in credit counseling, you will work with certified credit counselors — trained professionals who assess your financial situation and create a plan to help you manage your debt and prevent more serious financial problems.

How Does Credit Counseling Work?

Credit counseling begins with an in-depth review of your financial picture. During the initial session (which typically lasts about an hour) a certified counselor examines your income, expenses, debts and credit history to fully understand your financial situation. The goal is identifying patterns, habits and opportunities to make meaningful financial changes.

Based on this assessment, the counselor offers personalized advice. They help you create a realistic budget, identify areas to cut unnecessary expenses and suggest strategies to pay off debts. The focus is on giving you the tools to re-establish financial control and prevent your situation from worsening.

One of the key aspects of credit counseling is that it's not a one-time conversation. Counselors often provide ongoing support, checking in regularly to track your progress and adjust your plan as needed. These follow-up sessions help ensure that you stick to the strategies that will bring long-term financial stability. Credit counselors often provide access to financial literacy resources to further strengthen your financial habits, whether learning how to build credit or avoiding common financial pitfalls.

For many people, credit counseling is less about immediate fixes and more about creating a sustainable path to financial health.

Types of Credit Counseling Services

Credit counseling offers services such as debt counseling, budget counseling, credit report reviews and housing or bankruptcy counseling, all tailored to address specific financial needs. A counselor can evaluate your financial challenges and guide you toward the service that will best help you strengthen your financial health.

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    Debt Counseling

    Debt counseling focuses on helping individuals manage and reduce their debt load. A counselor will assess your debt situation, explain your repayment options and guide you on the best strategy for paying off your debts. This may include creating a debt repayment plan or discussing whether a more structured solution like a debt management plan is appropriate.

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    Debt Management Plans (DMPs)

    DMPs are structured repayment programs for those struggling with high-interest debt. Credit counselors negotiate with your creditors to reduce interest rates, waive fees or extend repayment periods. You pay monthly to the counseling agency, which is then distributed to your creditors. DMPs usually last three to five years and require consistent payments to be successful.

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    Budget Counseling

    Budget counseling helps you create a personalized financial plan that balances your income and expenses. A counselor will evaluate your spending habits and develop a budget to cover your essential needs while managing debt and savings. This service is valuable for anyone seeking better financial control and helps avoid financial stress caused by overspending or poor planning.

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    Credit Report Reviews

    In credit report reviews, a counselor examines your credit report and explains how your financial behaviors affect your credit score. They help you identify errors or negative items like late payments and guide you on how to improve your score. This service is ideal for anyone looking to build or repair their credit history.

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    Housing Counseling

    Housing counseling assists individuals with homeownership challenges, including foreclosure prevention, mortgage default and reverse mortgage decisions. They can also offer support with rental assistance and pre-purchase education, ensuring you make informed decisions related to housing.

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    Student Loan Counseling

    Student loan counseling helps individuals struggling to repay their student loans. A counselor will review your loan terms, explain repayment options and provide guidance on loan consolidation or income-driven repayment plans. They also help borrowers explore ways to reduce loan payments or avoid default.

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    Bankruptcy Counseling

    Bankruptcy counseling is mandatory before filing for bankruptcy. Pre-bankruptcy counseling helps determine if bankruptcy is the right solution or if there are other alternatives, like a debt management plan. Post-bankruptcy counseling focuses on rebuilding financial health and avoiding future debt issues. It provides guidance on meeting legal requirements and understanding the long-term impact of bankruptcy.

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    Credit Card Debt Forgiveness

    This service explores options for reducing or settling credit card debt. While debt forgiveness is rare, a counselor may work with creditors to negotiate a reduced payoff amount or alternative payment plans. This service is aimed at individuals who are overwhelmed with credit card debt and are looking for ways to resolve their obligations without declaring bankruptcy.

Credit Counseling Advantages and Disadvantages

Credit counseling can help you manage debt effectively, but it may come with fees and could temporarily impact your credit score. Weigh these advantages and disadvantages before deciding if it's the right choice for your financial situation.

Advantages of Credit Counseling

Here are some key benefits of credit counseling that can help you manage debt and improve your finances:

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    Professional Guidance for Payday Loans

    Credit counseling can help develop strategies to pay off high-interest payday loans, which often trap borrowers in a cycle of debt. With the counselor's assistance, you can prioritize repaying these loans and avoid further financial strain.

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    Relief From Debt Collectors

    If you enroll in a debt management plan, creditors are notified, which can stop aggressive collection calls and wage garnishments. This allows you to focus on repaying your debt without constant pressure from collectors.

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    Improved Credit Habits

    Beyond immediate debt management, credit counseling helps you become a more informed borrower. Learning to make better financial decisions can improve your credit score over time as you build habits supporting healthier credit use.

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    Single Monthly Payment

    For those enrolled in a debt management plan, all debts are consolidated into one monthly payment. This simplifies your finances and reduces the stress of managing multiple payment deadlines.

Disadvantages of Credit Counseling

Although credit counseling has its advantages, there are also some potential downsides to consider:

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    Credit Report Impact

    Enrolling in a debt management plan may result in a note on your credit report indicating that you're receiving assistance. Some creditors view this negatively, which could make it harder to get new credit or extend credit limits in the future.

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    Account Closure

    Accounts included in a debt management plan are typically closed, meaning you won't have access to those credit lines, even in emergencies. This helps prevent further debt accumulation but limits your access to credit during the repayment process.

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    Debt Management Plan Fees

    While initial counseling may be free or low-cost, there are usually fees associated with setting up and maintaining a debt management plan, which can add up over time.

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    Long-Term Commitment

    Debt management plans require three to five years to see results, which can be challenging for those looking for a quicker solution to their debt issues.

When Is the Right Time to Seek Credit Counseling?

The best time to seek credit counseling is when you're struggling to manage debt but can still make payments or if you're starting to fall behind on bills. Early action can prevent your financial situation from worsening.

Here are some other examples of when seeking credit counseling makes sense:

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    Struggling to Make Minimum Payments

    If you can only make minimum payments on your debts and are still struggling to keep up, credit counseling can help develop a more manageable repayment plan.

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    Falling Behind on Bills

    If you're starting to miss payments or are concerned about falling behind on your financial obligations, a credit counselor can help you get back on track.

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    Facing Aggressive Debt Collection

    If creditors or debt collectors are constantly contacting you, credit counseling can help you explore options like a debt management plan to reduce harassment.

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    Dealing With High-Interest Debt

    When high-interest loans or credit card debt are piling up, and you're finding it hard to pay them off, credit counseling can help you explore strategies to lower interest rates or consolidate your debts.

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    Considering Bankruptcy

    Before filing for bankruptcy, it's wise to explore whether credit counseling can offer a viable alternative, such as enrolling in a debt management plan to avoid bankruptcy's long-term consequences.

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    Requiring Help With Budgeting Skills

    If you're struggling to manage your income and expenses, credit counseling can help you develop a personalized budget and provide the tools to make better financial decisions.

How to Find the Right Credit Counselor

Browse nonprofit credit counseling agencies for a reputable counselor with recognized certifications and ensure they offer services that match your financial needs, whether it's debt management or budgeting support.

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    Check for accreditation

    Ensure the counselor is certified by a reputable organization, such as the NFCC or the FCAA. Ask about their certifications and expertise to confirm their qualifications.

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    Look for nonprofit agencies

    Nonprofit credit counseling agencies are more likely to offer affordable, unbiased advice compared to for-profit agencies, which may have hidden fees. Confirm the agency's nonprofit status to ensure transparent and fair guidance.

  3. 3
    Review services offered

    Different agencies may specialize in areas like debt management, housing counseling or bankruptcy advice. Ask what specific services they provide and how they deliver them — whether in person, online or over the phone — to ensure they match your needs. Also, inquire about the frequency of communication to understand the level of support you'll receive.

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    Check reviews and complaints

    Look for online reviews, Better Business Bureau (BBB) ratings and any complaints filed against the agency to ensure their credibility.

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    Ask about fees

    Although many nonprofit agencies offer free initial consultations, some may charge fees for debt management plans or ongoing services. Ask what costs are associated with their services and what they cover. If you're concerned about affordability, find out if they offer options like reduced rates or fee waivers.

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    Clarify agreements

    Some agencies may require formal agreements before providing services. Before signing anything, ask if you need to enter into an agreement and understand the terms involved.

Preparing for Your First Credit Counseling Session

To get the most out of your first credit counseling session, gather your financial documents and set clear, realistic goals beforehand. This preparation will help make the session smoother and more productive.

  1. 1
    Gather financial documents

    Bring recent pay stubs, credit card statements, loan documents and utility bills. This helps the counselor assess your current financial situation accurately.

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    Know your budget

    Be aware of your monthly income and expenses. This will allow the counselor to help you build a more effective budget.

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    List your debts

    Prepare a detailed list of all outstanding debts, including credit cards, loans and any other financial obligations. This will be essential in creating a debt management plan if needed.

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    Set clear goals

    Consider what you want to achieve from the session — whether it's managing debt, improving credit or creating a sustainable budget. This helps the counselor tailor their advice to your needs.

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    Prepare questions

    Write down any questions you have about the process, fees or specific concerns about your financial situation. Having these ready ensures you get the information you need.

FAQ About Credit Counseling

Below are answers to common questions that clarify how credit counseling works and how it can affect your financial situation.

What's the difference between credit counseling, debt settlement and debt consolidation?

Does credit counseling negatively impact your credit score?

How does credit counseling differ from bankruptcy?

Are credit counseling agencies regulated?

Is credit counseling free?

About Nathan Paulus

Nathan Paulus headshot

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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