Nonprofit credit counseling sounds like an ideal way to get out of debt. Asking a credit counselor to step in and take over your finances sounds easy and low-stress. But does it work?
Using credit counseling for debt relief is more complicated than it seems.
Will you be able to follow through and complete the plan? Here’s what you need to know.
Table of Contents
- Credit counseling is an excellent debt-relief option for people with $6,000 or less in credit card debt
- It can take between three to five years to complete a Debt Management Plan and become debt-free
- A Debt Management Plan will cost anywhere from $25 to $75 per month
- Your initial consultation should be free
- Credit card companies often subsidize credit counseling agencies (that’s how they can offer their services for free), but that also means they work best for credit card debt
- Credit counselors aren’t the best option if you have personal loans, medical bills or student loan debt that needs to be addressed
- Depending on your financial situation, debt consolidation loans and debt settlement may be better choices
Do You Need Credit Counseling?
Almost everyone can use a little bit of credit counseling. Whether or not it will be an effective debt-relief option is a bit more complicated.
Credit counseling is only an effective long-term debt-relief strategy if you complete a Debt Management Plan. The average completion rate for a 3-5 year program is between 55% to 70%.
The primary job of a credit counselor is to review your current financial status and develop the best plan to help you get out of debt and manage your money. Most agencies offer consumer credit counseling sessions through various platforms, including online via chat or Zoom, via telephone, or in-person in one of the company’s local offices.
Since credit counseling agencies are typically nonprofit organizations, their financial advices is available at no cost. It’s even possible that your bank or credit union offers these services.
Pro tip: Of course, there are for-profit credit counseling agencies out there, and if you go this route, you need to make sure the counselors are appropriately certified and that the organization itself is reputable.
Using credit counseling for debt relief can be an ideal option for people who have $6,000 or less in credit card debt, but their low credit scores prevent them from qualifying for debt consolidation loans with the lowest interest rates.
A credit counselor will carefully review your financial situation and set up a Debt Management Plan. They will work with your credit card issuers to negotiate lower interest rates. However, this is not a free service. You will pay a monthly administration fee ranging from $25 to $80. Since DMPs can take up to five years to complete, it’s important to find an accredited credit counseling agency with low monthly fees.
Pro tip: A fee on the lower end will cost about $1,800 for a five-year plan, while the same plan at $80 per month would cost a whopping $4,800.
When checking out a credit counseling agency, the Better Business Bureau (BBB) is a great place to start.
READ MORE: Nine best credit counseling services
Is Credit Counseling Better than Debt Settlement?
Sometimes it can be, particularly if you want to maintain your credit score.
Debt settlement is a similar service that involves hiring a third-party company to negotiate with your creditors and set up a repayment plan. However, instead of paying the full total of your debts at lower interest rates, the debt settlement company is negotiating a lower total debt amount. This can be particularly effective if your debts are overwhelming and there’s no realistic way for you to be able to repay it all in full, but you don’t want to have to file for bankruptcy.
Debt settlement will initially hurt your credit score, but it will rebound once your settlements are paid. And even though you pay a fee of 15% to 27% of your total enrolled debts, you still come out ahead because you’re paying back less than you owe. The average debt settlement customer repays about 80% of the full amount they owe after the debt settlement fees.
READ MORE: Debt management vs. debt settlement
Step-by-Step: How to Set Up a Debt Management Plan
You’ll need to do some prep work before the first appointment with your credit counselor. Gather information on your income, expenses and debts so the counselor can analyze them accurately.
Pro tip: Don’t hold back. If you leave information out because you’re embarrassed, you’re setting yourself up for failure.
The credit counselor will request your consent to perform a credit check. This will give the counselor a quick snapshot of where you stand regarding your overall credit health.
Pro tip: If you’d like to skip this step, request a free credit report from AnnualCreditReport.com and bring it to the meeting.
Once the counselor has all the necessary information, he or she will create a personalized budget, a review of your credit and a detailed Debt Management Plan.
Depending on the agency, the counselor may also offer:
- Free learning materials
- Financial workshops
- Follow-up sessions
You will then have the option of accepting the plan, continuing with the counselor’s help or taking the information home and attempting to work the plan independently.
Pro tip: If you have any questions about the plan or the process, now is the time to ask them.
If you accept the plan, you will start sending your monthly payment to your credit counselor, who will then pay your creditors. This ensures that all of your bills are paid on time and making sure you stick to the plan. You will pay a monthly administration fee during this period for the convenience of having the credit counseling agency controlling your payments.
To learn more about Debt Management Plans and how they work, check out this video:
Other Financial Education Services
Aside from Debt Management Programs, credit counseling offers several free or low-cost ways to help you improve your financial skills. They include:
- Debt counseling
- Helping you manage credit card payments and other bills
- Dealing with credit card issuers when a problem arises with your accounts
- Improving your financial literacy
- Providing an analysis of your current financial health and identifying any problem areas
- Creating a budget that works for you and your family
- Recommending additional resources and classes that would help you understand and improve your finances for the better
- Negotiating with lenders to obtain a lower interest rate will save you money over your loans
- Helping consolidate multiple credit card debts into a single lower monthly payment
- Providing suggestions for first-time homebuyers or renters
- Helping you get a copy of your credit report from the three major credit reporting agencies (Experian, TransUnion and Equifax)
- Bankruptcy counseling
- Helping small business owners separate business income from personal finances
- Help with foreclosure proceedings
How to Choose a Legitimate Credit Counseling Organization
If the agency you’re considering has the proper certifications, check how long they’ve been in business. You want to go with a company that has already proven itself over seven to 10 years. Check for reviews from other customers who have used the company to determine whether their experience was positive or negative.
Also look to see if it is accredited. Here are some of the major networks to check:
- The National Foundation for Credit Counseling (NFCC) is the best place to start looking for a qualified nonprofit credit counseling agency, but only after you’ve ruled out that your bank or credit union doesn’t offer this service. The NFCC has been around since 1951. They have a national network of nonprofit member agencies that assist in various programs and services. All financial counselors are certified, and no one who needs help is turned away.
- The Financial Counseling Association of America (FCAA) is another well-known agency with reputable counselors. It’s a member-supported 501(c)(3) non-profit national association with a mission to refer consumers to a financial counseling company that can help them with student loan counseling, bankruptcy advice, debt management, and housing counseling.
- If opting for a lesser-known credit counseling agency, you’ll want only to consider companies with counselors accredited by the International Standards Organization (ISO) or the Council on Accreditation (COA). Next, check if the agency is appropriately licensed and bonded to conduct business in your state.
READ MORE: American Consumer Credit Counseling review
Verify the Credit Counselor‘s Certification
When selecting a credit counselor, choose someone who will give you the proper time and attention you deserve. Any meeting shorter than an hour isn’t enough to examine your financial situation and develop an improvement plan. The counselor should be able to provide you with a personalized budget and not a cookie-cutter printout.
The FTC provides a list of questions to ask potential credit counselors.
Check for Agency Complaints or Red Flags
Credit counseling agencies that are not legitimate will often have red flags that warn you against using them. For example, any agency that promises to completely clean up your credit for a set fee is a scam. Improving your credit score takes time, whether you do it yourself or get help from a counselor (or a credit repair company). An agency cannot alter the amount of time your accounts have been open and in use.
Another red flag is requesting upfront fees before any services have been provided. There is a federal law against requesting upfront fees and the Consumer Financial Protection Bureau monitors violations.
Is it a Nonprofit or For-Profit Agency
Both nonprofit and for-profit credit counseling agencies offer similar services but the fee structures differ.
Nonprofit agencies do not make money off of their customers. Instead, they receive funding from another organization, like a bank, credit union, credit card company or even the U.S. government. They sometimes charge a very minimal fee to cover administrative costs. But in many cases, the counselor’s services are free to the client.
For example, nonprofit Money Management International has an average set-up fee of $34 and an average monthly fee of $24. The company has a hardship waiver and reduction of fees for individuals who qualify for the discount.
On the other hand, for-profit credit counseling agencies charge customers directly for their services. They do not receive funding from outside sources. Legitimate for-profit agencies have monthly service fees and may also initially have a one-time set-up fee.
Other Criteria to Consider
- Accreditation and certification: Most nonprofit agencies are accredited by the Financial Counseling Association or the National Foundation for Credit Counseling
- Access: Ask yourself whether you’d like to meet with your counselor over the phone, online or in person
- Cost: Prices vary between agencies and services required, so ask for a complete cost breakdown
Credit Counseling Success Story
Consider this story posted to Reddit by u:dogfacedandhurt, who fell into debt after the spouse underwent brain surgery. The poster turned to a nonprofit credit counselor for help.
The credit counselor is at a nonprofit and was an absolutely lovely human, so kind, understanding, patient, and supportive. The cards are closed (which was the only contingency to agreeing to this plan) and I’m on a 5-year [Debt Management Plan]. Chase interest is down to 2% and PayPal is 0%. Permanently. There are no late fees for the program, the only thing that will show on my credit report is three closed accounts, and in three years my credit will have skyrocketed AND I’ll be completely out of debt with paying a fraction of that original $1800/month. I honestly can’t believe this is real. I can’t stop crying. I am so happy, so relieved, and I genuinely feel like a million pounds have been lifted off of me. It’s gonna be okay, y’all. It’s actually gonna be okay.
Credit Counseling Won’t Work for Everyone
Credit counseling will work for people with too much credit card debt who want to protect their credit score. If you’re paying more than 20% of your monthly take-home pay to credit card companies, credit counseling can be a big help.
Pro tip: Credit counseling is most likely to work for clients with credit card debt. It is less likely to work for people with other debts. This includes unsecured personal loans, medical bills or student loans.
It will not be a perfect solution. You will repay 100% of what you owe plus interest, which could take several years to complete the program. And your credit card accounts will be closed, except one for emergencies. But if you need the discipline of a pre-set plan with oversight and defined goals, it could be an excellent way to address your financial struggles.
Four More Debt Relief Options to Consider
Besides credit counseling, several other effective debt relief options are available. Here are a few:
The Bottom Line
Credit counseling is a legitimate way to get out of debt and improve your financial situation. For many people, it means significant relief — if they can make it through the program and end up debt-free.
And if it sounds like credit counseling won’t work for you, there are several other options to try, including debt settlement, debt consolidation and even bankruptcy as a last resort.
Both credit counseling and credit repair can help you reduce your debts, but they go about it differently.
With credit counseling, you work with an experienced, licensed credit counselor who can help you get ahead of your debts. Meanwhile, the main purpose of credit repair is to build up your credit, especially after it’s been affected by things like debt or delinquencies. While credit counseling can help you improve your credit, credit repair companies focus solely on this aspect of your financial health.
A credit repair company will not help with debt consolidation or provide a debt management plan. Instead, they look for errors in your credit report and help you remove them. Depending on the company, they’ll also write to the credit bureau on your behalf to correct the errors.
There are two main ways to create a budget. You can do it yourself or use a budgeting app or service.
The first step in developing a personal budget is calculating your total net income (take-home pay after all deductions). Make sure you consider all income sources, including passive income, alimony, side gigs, etc. Once you’ve done that, calculate all of your fixed and variable expenses — that is, any bills, debts, and other monthly spending categories.
The next step is to write down some short-term and long-term financial goals. Examples of short-term goals include saving $500 or paying off a credit card. A long-term goal, meanwhile, could be to save up for a down payment on a house or set aside money for a child’s education.
Finally, look for any areas where you can reduce spending. Each month, put any extra money you have towards paying down your debts. Every so often, go back over your budget and make changes based on your current financial situation.
Unlike most credit counseling agencies, debt settlement and debt relief companies are usually for-profit. This means they charge a fee for their services, though you won’t have to pay until the service is complete.
Debt settlement companies work directly with debt collectors and creditors to try to settle your debts at a reduced amount. However, since creditors aren’t obligated to agree, debt settlement doesn’t always work.
In most cases, the debt settlement company will encourage you to stop making payments on your enrolled debts until negotiations are finished. This will negatively impact your credit score, though you’ll be able to rebuild it at the end of the program.
Credit counselors don’t usually work directly with payday lenders. However, they can give financial advice to help you repay your loans or offer a debt management plan. They might also suggest a debt consolidation program for you. These options can make it easier to pay off your payday loans.
This depends on the service or program. Initially, the credit counselor might perform a hard pull on your credit report, which will cause a temporary dip. A debt management plan or debt settlement program could also cause your score to drop. However, other options like debt consolidation could actually help your credit score. And, as your financial situation improves, you’ll be able to start rebuilding credit as a byproduct of credit counseling.