Definition
Credit counseling is a service provided by non-profit or for-profit organizations that offers education and assistance to help consumers manage their finances, develop budgets, and address debt problems. Credit counselors work with individuals to review their financial situation, create personalized action plans, and provide resources for improving money management skills. Services often include debt management plans (DMPs), where the counseling agency negotiates with creditors for reduced interest rates or waived fees and the consumer makes a single monthly payment to the agency, which then distributes payments to creditors. Credit counseling is required before filing for bankruptcy and can be a helpful intermediate step before considering more drastic debt relief options. Reputable credit counseling agencies are typically non-profit and offer services for free or at low cost.
Frequently Asked Questions
How do I choose a reputable credit counseling agency?
Look for these characteristics in a reputable credit counseling agency: (1) Non-profit status (though not all non-profits are legitimate); (2) Accreditation from organizations like the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA); (3) Free or low-cost initial consultations; (4) Trained, certified counselors; (5) Transparent fee structures; (6) Educational resources beyond debt management plans; and (7) Good reviews and ratings with the Better Business Bureau and Consumer Financial Protection Bureau. Avoid agencies that pressure you into services or make promises that seem too good to be true.
How does credit counseling affect my credit score?
Simply meeting with a credit counselor for advice or education has no impact on your credit score. However, enrolling in a Debt Management Plan (DMP) through a credit counseling agency may have varying effects. Some creditors may note that your account is being paid through a DMP, which can temporarily lower your score slightly. The long-term effects are typically positive as you make consistent payments and reduce debt. Credit counseling is generally less damaging to your credit than debt settlement or bankruptcy.
What's the difference between credit counseling and debt settlement?
Credit counseling helps you repay 100% of your debts, usually with lower interest rates and waived fees negotiated by the counseling agency. You make regular monthly payments, and agencies are typically non-profit with minimal fees. Debt settlement companies, by contrast, attempt to negotiate lump-sum settlements for less than the full amount owed. They often advise stopping payments to creditors while saving for settlements, which damages credit and risks lawsuits. Debt settlement companies are usually for-profit and charge substantial fees (15-25% of the debt amount). Credit counseling has a milder impact on credit, while debt settlement can significantly damage your credit score.
Need Credit Help?
Discover tools and resources to help improve your credit score and financial health.