How Credit Counseling Works: Will It Get You Out of Debt for Good?

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?

But using credit counseling for debt relief can be more complicated than it seems.

Will you be able to follow through and complete the plan? Here’s what you need to know.

What is Consumer Credit Counseling?

Consumer credit counseling agencies offer services to help you manage your money and debts. If you need financial advice, working with a credit counselor is a great way to get help for free or at a low cost.

Credit counseling agencies are typically nonprofit organizations. The counselors who work there must be certified, meaning they have completed a training program in money and debt management, budgeting and consumer credit, then passed an exam designed to assess their financial expertise.

Most counseling agencies offer basic free services to help you manage your money.

How Does Credit Counseling Work?

You will set up a free initial consultation with a credit counseling agency. During that meeting, a credit counselor will review your financial situation with you and offer budgeting advice.

What are Some of the Services Offered by a Credit Counseling Service?

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 Much Does Credit Counseling Cost?

Credit counseling itself is free for basic financial advice, though there may be a nominal fee for some courses (for example, two mandatory courses are required for bankruptcy filings, and they cost anywhere from $20 to $50 each).

How Do Credit Counseling Agencies Help Consumers with Excessive Debt?

If your debt is too large to be managed by better budgeting or repayment strategies, credit counselors can also set up and administer a Debt Management Plan to pay down your debts.

What is a Debt Management Plan?

When a client has a large amount of debt, a credit counselor can set up and monitor a DMP.  This is a personalized plan designed to repay your debts.

Debt Management Plans only work with unsecured debts, so they won’t be useful if your debt is due to secured loans. DMPs will be most effective for clients with significant credit card debt. 

As part of the DMP, the credit counselor will contact your credit card companies to negotiate lower interest rates. 

For example, Cambridge Credit Counseling says its counselors will typically negotiate a 6% to 10% reduction in your credit card interest rates.

They will then craft a repayment plan that can last as long as five years. You will make monthly payments to the credit counseling agency, and they will make your monthly payments.

It’s important to note that credit counseling agencies negotiate with credit card companies, but do not typically negotiate interest rates on personal loans, payday loans, medical bills or student loans. Though the counselor will include them in your repayment plan, your payments will be based on those loans’ current interest rates. 

Pro tip: For this reason, DMPs are most effective for people who have a large amount of credit card debt.

DMPs work best for people who are disciplined enough to work independently to improve their spending habits and boost their credit score while also making their monthly payments to the credit counselor.

READ MORE: Debt Management Plans

How Long Does a Debt Management Plan Last?

There isn’t a fixed amount of time for Debt Management Plans. The plan will go on as it takes you to pay off your debts. You can speed up the process by increasing repayments, but it isn’t unusual for DMPs to take five or even up to ten years to complete.

How Long Does a Debt Management Plan Affect Your Credit Rating?

DMPs are not listed on your credit reports. Instead, they may be noted on the loans or credit card accounts you are working to pay off. Lenders may see these notations when you apply for new credit, and they will remain on your credit reports until the DMP has been completed.

When the DMP is complete, the notations will be removed and your credit card accounts will be closed. The closed accounts will remain on your credit reports for six years, but will simply be marked as closed. The closed accounts may initially hurt your credit score, because it will decrease your available credit and increase your credit utilization. The damage should be temporary, and you should see your credit score start to rebound within a few months.

READ MORE: Why did my credit score drop?

Pro tip: The credit counseling agency may let you keep an account or two open for emergencies. In those cases, the accounts will be classified as paid on time and in full. 

How Much Does a Debt Management Plan Cost?

While most basic credit counseling services are free, there will be a fee for Debt Management Plans. Many will charge an initial fee to develop the plan, which averages about $40. You will also 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

Debt Management Plan vs. Making Minimum Payments

Minimum paymentsDebt Management Plan
Starting debt$15,000$15,000
Average interest rate26%10%
Monthly payment$475$325 + $25 monthly fee
Time to become debt-free398 months60 months
Total interest$31,806$3,634
Total cost$46,806$20,134

What is the DMP Success Rate?

According to data from the Federal Trade Commission, approximately 20% to 30% of people who enroll in Debt Management Plans successfully complete the program. For comparison, debt settlement programs have an average completion rate between 45 to 50%, and Chapter 13 bankruptcy has a 33% completion rate.

How to Qualify for a Debt Management Plan

Debt Management Plans work best for people who have their secured debts (mortgages, auto loans) under control but are struggling to repay unsecured debts.

They work best for people who:

  • Have a significant amount of unsecured debts ($5,000 or more)
  • Have unsecured debts totaling more than 36% of their annual income
  • Want someone else to negotiate with creditors
  • Have a steady income
  • Need a single payment, but won’t qualify for a debt consolidation loan
  • Distressed renters
  • Student loan borrowers
  • Military service members and veterans

Pros and Cons of Credit Counseling

Many free servicesCreditors may not be willing to participate
Debt Management PlansPrincipal isn’t reduced
Could pay less in interest and feesOnly unsecured debts are eligible
Fewer collection callsAgency fees
Less stressWill potentially lower credit score
Better money management skillsYou can’t use existing credit
Help with negotiation and debt managementYour credit card accounts will be closed

How Are Consumer Credit Counseling Agencies Financed?

Credit counseling was established in the 1950s by the credit card companies to help consumers avoid filing for bankruptcy. In most cases, when consumers file for bankruptcy, credit card companies do not get paid. The creation of the agencies was to help the creditors recoup their money while providing clients with basic financial education.

This means that most credit counseling agencies are funded by “grants” from credit card companies. The rest of the costs are subsidized by consumer fees.

Pro tip: This means that your credit counselor’s salary is technically paid by the credit card companies that hold your debt. They have an existing relationship with these creditors, who are willing to negotiate lower interest rates. However, the underlying focus will be on helping the credit card companies. They do not typically negotiate with other unsecured creditors, so you will repay the total amount you owe at the current interest rates.

How Long is a Credit Counseling Course?

Your initial credit counseling session should take between 60 to 90 minutes. It could go longer if your financial situation is particularly complicated. The consultations can be in person, by phone or online.

If you need to complete credit counseling courses as part of a bankruptcy filing, you will have to attend two mandatory classes (which can be completed online). Each will take anywhere from 60 to 90 minutes, and you will need to get certificates of completion to present to the bankruptcy trustee.


Credit counseling agencies draw a fair amount of criticism, particularly due to potentially predatory practices that are seen as taking advantage of struggling consumers. 

Practices include:

  • Charging unreasonable fees
  • Failing to meet required standards
  • Failing to provide affordable solutions
  • Neglecting to inform customers of other debt services elsewhere
  • Ambiguous qualification standards

It’s hard to tell how much education is required to become a Certified Credit Counselor. Some programs say having a Bachelor’s degree and completing a certification program is best, but the degree isn’t necessary. Theoretically, your credit counselor could be someone whose only qualification was completing an online program and passing a certification exam.

Pro tip: If you choose a Debt Management Program, ask your credit counselor about his or her credentials. You want to ensure you’re working with someone who will advocate for you rather than the credit card companies.

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

Choose a Certified Credit Counselor

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

READ MORE: How to build credit

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.

READ MORE: Debt relief

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


How is a Debt Settlement Plan Different from a Debt Management Plan?

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

How is Debt Consolidation Different from a Debt Management Plan?

Debt consolidation rolls your current debts into one larger loan with one monthly payment. The key difference is that debt consolidation is typically a DIY way to tackle debt repayment. You apply for the new loan (ideally with a lower interest rate) and use that loan money to pay off your other debts. Then you make one monthly payment. With Debt Management Plans, your debts remain separate, but you make one monthly payment to a credit counselor, who then pays your other creditors. The credit counselor also may be able to negotiate lower interest rates on your credit card debts.
READ MORE: Debt consolidation

Can I Still Rent an Apartment with a DMP?

Many landlords will run a credit check when you complete a rental application. When they do this, they will see that you’re on a Debt Management Plan. It may signal to them that you may not be able to pay your rent and bills each month and make them less inclined to choose you as a tenant. 
However, some landlords don’t run credit checks, so you should still be able to find a place to rent. You may just have to do a bit more searching than average. 

Can I Get a Mortgage with a DMP?

Getting a mortgage can be tough even with a good credit score, so your chances are lower if you have delinquent debts on your credit reports. However, there are lenders who specialize in mortgage loans for borrowers with low credit scores, so you may be able to qualify. However, you’ll pay a higher interest rate than typical borrowers.

Scroll to Top