Credit Counseling

By Mike G.

Credit counseling is help from a counselor, usually at a nonprofit agency, who reviews your whole budget and your debts with you. For some people it leads to a debt management plan, where the agency works with your creditors on lower rates and you make one monthly payment.

How it works

A first session usually covers your income, expenses and every debt. The counselor helps you build a budget and explains your options.^[1]

If your unsecured debts are the main problem, the counselor may suggest a debt management plan (DMP):

1. The agency contacts your creditors and asks them to lower interest rates or waive some fees. Creditors may agree, but they don’t have to, so it’s worth confirming with each one.^[2]
2. You make one monthly payment to the agency, which pays each creditor.^[1]
3. You repay the full balances, usually over several years. Enrolled card accounts may be closed, and you may have to agree not to apply for or use new credit during the plan.^[2][5]

A DMP isn’t a loan and doesn’t reduce what you owe. It makes the debt cheaper and more manageable to repay.

Who it fits

Credit counseling tends to help people who:

• Can’t comfortably cover their minimum payments
• Would take many years to pay off on their own
• Don’t qualify for a consolidation loan with a better rate
• Want an outside, structured plan rather than going it alone

The Debt Audit points here in two cases: when your minimums don’t fit in your budget, and when the avalanche plan would take more than about five years. See the rules on How the audit works.

A DMP works best with steady income that covers the new single payment. If even a reduced payment isn’t realistic, a counselor can also explain the other options, including bankruptcy.

Pros and cons

Pros

• Lower interest rates or waived fees can shorten the payoff significantly
• One payment instead of many
• A trained counselor looks at your whole budget, not just the debts
• No new loan and no credit score requirement

Cons

• A DMP usually takes several years to finish
• Enrolled cards may be closed, and new credit may be off-limits during the plan
• Plans may charge setup and monthly fees
• If you stop making plan payments, card issuers can generally raise your rate back up^[6]

What it costs

Counseling sessions are often free or low-cost. A debt management plan may charge a setup fee and monthly fees. Get a specific quote in writing for any one-time or monthly fees, and ask what happens if you can’t afford them.^[1] Nonprofit status alone doesn’t guarantee that services are free or cheap.^[2]

How it affects your credit

A counseling session isn’t a credit application. A debt management plan can affect your credit in a few ways. Enrolled accounts may be closed, which reduces your available credit.^[5][7] Paying on time throughout the plan builds a positive payment history,^[7] and finishing it leaves you debt-free on those accounts.

Red flags

• Big fees up front, before any service is provided
• Pressure to sign up for a plan before a counselor has reviewed your budget
• Being told to stop paying your creditors. That’s how debt settlement works, not credit counseling.
• Promises to erase debt or fix your credit quickly
• Won’t give you fees, services and terms in writing

Before choosing an agency, ask about its licensing and accreditation, and check for complaints with your state attorney general. The Federal Trade Commission publishes a list of questions to ask.^[3] If you’re considering bankruptcy, the counseling required before filing must come from an agency approved by the U.S. Trustee Program (or, in Alabama and North Carolina, the bankruptcy administrator).^[4]

Frequently asked questions

Sources