1. DEBT SOLUTIONS

Credit card counseling pros and cons

FDR article counseling ar-min
BY Erik J. Martin
Apr 12, 2023
Key Takeaways:
  • Consumer credit counseling agencies can help you learn how to manage your debts.
  • Credit counseling includes budgeting advice and a plan to pay off your debt in 3-5 years.
  • A debt management plan doesn’t reduce what you owe, but your creditors might agree to waive fees or lower your interest rate.

Feel like you don’t know how to keep your finances under control? You’re not alone. Nearly 43% of Americans failed a national financial literacy test. Meanwhile, millions across the country are in heavy credit card debt. Many don’t have any money saved for retirement. And many don’t know how to budget.

Wouldn’t it be great if there were organizations that could help you learn about your finances? Actually, there are. They’re called consumer credit counseling agencies, and they could have resources to help you get out of debt. But before committing to this option, learn about credit card counseling pros and cons.

What is a consumer credit counseling agency?

Consumer credit counseling agencies are usually non-profit organizations that provide money management advice and debt help for those struggling with their finances. Need financial assistance? A credit counseling agency can help you:

  • Improve your financial literacy

  • Budget better and save money

  • Learn about debt relief options

  • Get out of credit card debt, medical debt, and other kinds of unsecured debt

  • Find student loan counseling and bankruptcy counseling services

Consumer credit counseling agencies offer free workshops and resources. These can help you with budgeting, debt management, saving money, and establishing long-term financial goals. Credit counselors who work at these agencies can also evaluate your budget. They can discuss your financial concerns and position you to improve your situation.

If you’re having issues paying off your debt, a credit counseling agency may help. Depending on how much you owe, they could give you resources and advice to help you get out of debt. Or they can offer a Debt Management Plan to help you free yourself from debt.

What is a debt management plan?

Consumer credit counseling agencies offer something called a Debt Management Plan (DMP, also known as a Debt Management Program) to help you manage your debts and your credit health. These plans can save you money in some cases if the counselor negotiates with your creditors to reduce the interest rates on your accounts and waive certain fees. 

Here’s how a DMP works:

1. You request an evaluation by a credit counselor. The two of you will discuss your income, monthly expenses, credit card and debt balances, and other financial obligations. The counselor will pull your credit report with a soft credit check that won’t affect your credit score. After reviewing your information, they will map out your debt relief options and let you know if a Debt Management Plan is right for you.

2. If you qualify for a DMP, your credit counselor will help you enroll. You choose which debts you want to enter into the program and decide how much you can pay each month into your Debt Management Plan account, run by your credit counseling agency to pay your creditors. 

3. Then, the credit counseling agency contacts your creditors to negotiate a lower interest rate. This reduced rate is called a concession rate. When your creditor agrees to the new terms, you countersign the agreement and start your Debt Management Plan.

4. After your Debt Management Plan is set up, you’ll pay a startup fee. Then you’ll make monthly payments into an account that the credit counseling agency uses to pay your creditors. Your credit counseling agency will also collect a monthly fee for maintaining your Debt Management Plan. 

5. You continue to pay into your Debt Management Plan account, and your credit counseling agency continues to pay your creditors until all of your debt is gone. This process usually lasts 3-5 years.

6. You must agree to make regular payments on time per your plan. If not, you could lose out on the plan’s benefits, including any negotiated discounts or fee waivers.

A Debt Management Plan isn’t for everybody. But it could be right for you if:

  • You can afford to make a monthly payment toward your debts

  • Your intention is to repay your debts in full

  • You want help and guidance

  • You don’t want to file for bankruptcy or you don’t qualify

  • You want to learn how to maintain a good credit score

but you’re feeling overwhelmed by the process, need help getting organized, can get a lower interest rate. 

How do you qualify for a debt management plan?

To qualify for a Debt Management Plan, your credit card, personal loan, medical debt, and other unsecured debt should add up to 15%-39% of your annual income. But there's technically no minimum debt requirement to be eligible.

You must agree to make monthly DMP payments before a consumer credit counseling agency lets you enroll. 

Credit card counseling pros and cons

As with any other debt relief option, credit counseling has its pluses and minuses.

Benefits of consumer credit counseling

One of the biggest perks of working with a credit counseling agency? They can help you consolidate your outstanding debt into a single account.

Making just one monthly payment can simplify your finances. You won’t have to fret about different due dates. Simpler repayment means less financial stress.

Think about that. You can consolidate without needing a new loan or taking on more debt. Additionally, all of your DMP payments will go directly toward your debt. As a result, you might be able to pay off your debt more quickly compared to going it alone.

What’s more, the credit counseling agency can work to get you a lower interest rate. The goal is to have you pay off all of your existing debt within five years. This is more than doable if your agency can reduce your rates, finance charges, and fees.

Also, the counselor will help you create a workable monthly budget. You’ll learn to organize your money better and adopt healthier financial habits.

If you have delinquent accounts, you can expect fewer collection calls after enrolling in the DMP. After creditors accept your DMP, the pesky phone calls, emails, and messages from debt collection agencies should stop or slow down.

Disadvantages of consumer credit counseling

Credit counseling is a good option if you have modest debts. But there are downsides.

Qualifying for a Debt Management Plan may be hard if you have a large debt and don’t make enough income. For these and other reasons, some creditors may not agree to participate in your DMP. These creditors will need to be paid back separately.

DMPs only apply to unsecured debt, such as personal loans or credit cards. So if you have auto loans, a mortgage, or other debts like student loans, a DMP won’t help with these.

You won’t be allowed to use credit while your DMP is in effect. You’ll have to close your credit accounts to prevent getting into more debt. New lines of credit will be closed to you, as well.

Professional debt help isn’t free. For a DMP you’ll pay a startup fee and monthly fees. Fees vary, so you’ll need to research a credit counselor that offers an affordable plan. Your initial setup fee can cost $50 or more. Monthly fees are often $40-$70.

Your credit score could drop slightly after enrolling in a DMP and closing credit accounts. But your score should bounce back soon if you make your DMP payments on time.

Lastly, a DMP has limitations. Your credit counseling agency can help you decrease interest rates and avoid certain fees. But they can’t help you reduce the principal amount you owe. 

If you have a massive debt amount, you might want to look into debt settlement instead. Debt settlement could get you out of debt for less than a DMP may charge. That’s because debt settlement works to negotiate with creditors to shrink your total debt amount – not just the interest rate. You can learn more about debt settlement here.

Credit Counseling ProsCredit Counseling Cons
Consolidate debt into a single account with only one payment neededSome creditors may not agree to participate
100% of DMP payments go toward your debtDMP only applies to unsecured debts
Could get your interest rate, and fees reducedYour principal amount owed won’t be reduced
Learn better money management habitsYou won’t be allowed to use existing credit or open new credit
Expect fewer collection callsThe agency may charge fees
Reduce financial stressYour credit score may drop slightly

Think you’re a good candidate for a DMP after learning about credit card counseling pros and cons? Your next step is to find a reputable credit counseling agency in your area.

How to find the right credit counseling agency for you

Whether you’re seeking help with your budget or need to enroll in a DMP, here are a few resources that could help you find a credit counseling agency:

Not all credit counseling agencies are legitimate, so before you contact a credit counseling agency:

  • Check out their customer reviews online

  • Verify that they are licensed and accredited in your state

  • Verify that they are accredited by the NFCC, the FCAA or both

If they don’t meet these criteria, you may want to keep looking.

Even if a credit counseling agency seems legitimate, keep your guard up. Plenty of companies look good on paper but could end up being scams. Here are some red flags that the credit counseling agency you’re dealing with is too good to be true:

  • Credit counselors aren't certified or accredited by a third-party organization such as NFCC

  • Try to charge upfront fees before they negotiate any new terms with your creditors

  • Guarantee that using their service will improve your credit score

  • Pressure you into a DMP without telling you about your other options

  • Aren’t upfront about their fees or how their DMP works

Credit counseling agencies: the bottom line

Credit counseling agencies can offer multiple ways to deal with debt stress—from free resources to Debt Management Plans. With their help, you could be debt-free, faster, and for less money than it would take to pay off your debt by making minimum payments. But, like all other debt-relief options, credit counseling has pros and cons.

If you’re deep in debt and having trouble making minimum monthly payments, a credit counseling agency may not be the best choice. Weigh all of your debt relief options before committing to one.

Insights into debt relief demographics

We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during June 2024. The data provides insights about key characteristics of debt relief seekers.

Credit card balances by age group for those seeking debt relief

How do credit card balances vary across different age groups? In June 2024, people seeking debt relief showed the following trends in their open credit card tradelines and average credit card balances:

  • Ages 18-25: Average balance of $7,378 with a monthly payment of $209

  • Ages 26-35: Average balance of $10,797 with a monthly payment of $300

  • Ages 36-50: Average balance of $14,340 with a monthly payment of $405

  • Ages 51-65: Average balance of $14,364 with a monthly payment of $420

  • Ages 65+: Average balance of $14,837 with a monthly payment of $397

These figures show that credit card debt can affect anyone, regardless of age. Whether you're just starting out or nearing retirement, managing credit card debt can be challenging.

Manage Your Finances Better

Understanding your debt situation is crucial. It could be high credit use, many tradelines, or a low FICO score. The right debt relief can help you manage your money. Begin your journey to financial stability by taking the first step.

Show source