Credit Counseling Definition & Meaning
Credit counseling summary:
Credit counseling organizations could help you make a plan to get out of debt.
If you enroll in a debt management plan, your credit counselor could also teach you about budgeting and money management.
Look for an accredited nonprofit credit counseling organization with reasonable fees.
What Is Credit Counseling?
Credit counseling is a service that provides financial advice and helps people create plans to manage debt. A credit counseling organization can set up a debt management plan between a debtor and their creditors and assist with setting up a budget as part of that plan. Most credit counseling organizations are nonprofits, and employees are typically certified or accredited.
Key Aspects of Credit Counseling
Credit counseling organizations offer free or low-cost assistance with debt and money management. These organizations employ professional credit counselors who can work with you and your creditors to set up a debt management plan (DMP) if you qualify.
A DMP is a three-to-five-year payment plan. You make one monthly payment, and the credit counselor divides it among your creditors. You follow the payment plan until you’ve repaid your debt. This type of plan usually has a large monthly payment, so it’s not right for everyone.
A common misconception is that credit counselors can help people learn how to budget and manage their personal finances. Beyond an initial consultation, credit counselors normally don’t provide this type of advice unless you’re in a DMP. If you enroll in a DMP, then a credit counselor can work with you on a budget as part of that plan.
How to Find a Credit Counseling Agency
The National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA) can connect you with accredited credit counselors. The U.S. Department of Justice also has a list of approved credit counseling agencies available online, although the list is for agencies that offer pre-bankruptcy counseling.
As you search for credit counseling agencies, consider the following questions to narrow down your list:
What are the fees? Credit counseling agencies typically charge an administration fee of $25 to $50 per month for a DMP. If an agency charges significantly more, you may want to keep looking.
How is credit counseling offered? Depending on the credit counseling agency, services may be available in person, online, or over the phone.
What qualifications do the credit counselors have? See if counselors have certifications, accreditations, or other professional training.
Alternatives to Credit Counseling
If you’re looking for financial education without enrolling in a DMP, credit counseling most likely won’t work for you. You could get this type of guidance from an Accredited Financial Counselor® (AFC®). The Association for Financial Counseling & Planning Education® has an online tool to find an AFC in your area.
You may find financial workshops or programs at local banks, credit unions, or your local library. There’s also a wealth of free educational resources online.
A credit counselor might not be able to assist you if you’re already far behind on debt payments or you can’t make your minimum payments. For more challenging amounts of debt, consider a debt relief program. A debt consultant can look at what you owe and explain your options, such as debt consolidation or a debt settlement agreement with your creditors.
Credit Counseling FAQs
Credit counseling could set up a payment plan for your debt and possibly negotiate with your creditors. If you enroll in a debt management plan, a credit counselor could also work with you to make a budget. One of the main downsides of credit counseling is that you typically need to be in a debt management plan to get financial assistance. Credit counseling may also be less effective if your debt is too overwhelming to pay off or if bankruptcy is inevitable.
During a credit counseling session, the counselor will ask what kind of debt you have and review your financial situation. The counselor then makes recommendations and goes over debt repayment options with you. The initial consultation usually takes less than an hour. Whether you pay a fee for this initial session can depend on which credit counselor you use.
Credit counseling is a form of assistance where someone helps you create a plan to deal with your debt problems, and that can include a debt management plan. In a DMP, a credit counseling agency works with your creditors to lower your interest rates and set up a three-to-five-year repayment plan, and you make one monthly payment to the agency instead of several to your creditors. Debt settlement is a negotiation with creditors to accept a reduced one-time payment instead of the full balance you owe. Bankruptcy is a court-ordered process that discharges some, and possibly not all, of your debts. You might have to give up some of what you own or agree to an aggressive repayment plan.
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