Credit Counseling

Credit Counseling
Credit counseling is a service that provides support for borrowers facing problems with debt. It may consist of financial education, a debt management plan, or assistance navigating bankruptcy.

What is Credit Counseling?

Credit counseling—sometimes referred to as “debt counseling,” or “financial counseling”—is a process that helps borrowers manage their debts and improve their financial standing. Borrowers typically seek a credit counselor when they can’t afford to make payments on one or more debts. These debts may include student loans, medical bills, mortgages, credit card balances, payday loans, title loans, and more.

Credit counseling began in 1951, when leading U.S. creditors created the National Foundation for Credit Counseling. The goal of the organization was to educate borrowers about personal finance and help them reduce their debt. Today there are thousands of credit counseling organizations that offer help and advice to borrowers through face-to-face sessions, over-the-phone counseling, and online services.

How does Credit Counseling work?

There are two main elements to the credit counseling process: financial education and debt management. People who use a credit counseling service or agency can expect to learn about interest rates, debt, and money management.

Many agencies also help borrowers by offering a Debt Management Plan (DMP). In a DMP, the credit counseling agency will consolidate all of the borrower’s debts into one payment. That payment will be made to the organization or agency, and then distributed among the various creditors. DMPs typically last three to six years, and borrowers are restricted from taking on any new debts during that time period.

Another aspect of credit counseling is that the counselors may negotiate with creditors on a borrower’s behalf in order to lower the total amount owed. By using a legitimate credit counseling organization, a borrower may be able to pay back less than was initially owed.

When should I seek Credit Counseling?

The point at which people seek credit counseling varies. Here are eight red flags that experts have cited as signs that someone may want to contact a counselor:

  • Debt collectors are calling
  • Living paycheck to paycheck
  • Household stress
  • Hiding bills from a spouse
  • Maxing out credit cards each month
  • More debt than a borrower can keep track of
  • Pulling money from retirement to pay debt
  • Using cash advances or payday loans

How does Credit Counseling affect credit score?

Credit counseling does not directly affect your credit score. However, some of the actions that a credit counselor may suggest can have an impact on a borrower’s score.

A formal debt management plan in which debt is consolidated, for instance, will appear on a credit report. But this won’t affect credit score if all the debts are paid in full. If borrowers settle their debts for less than they originally owed, however, there will almost always be a negative effect on their credit score. Bankruptcy will also have a negative effect on a borrower’s credit score.4

How do I choose a Credit Counselor?

Most credit counseling services are offered through non-profit organizations. This doesn’t mean that the company will necessarily offer free services, or that they are a legitimate and trustworthy source. Make sure to always read the fine print, and watch out for hidden fees and unreasonable terms that may lead to further debt.

It’s wise to find an agency that offers in-person counseling. Many colleges, military bases, and housing authorities offer non-profit credit counseling. You may also be able to find options through your bank, credit union, or local consumer protection agency.

Reputable agencies and organizations will always offer to send free information on their services without requiring you to provide any information or payment. If a company is unwilling to do so, it may not be a safe option.