Credit counseling: What to know before signing up

If you’re feeling the pinch in your budget from debt payments, you join millions of other Americans facing increasing consumer debt. The Federal Reserve Bank of New York‘s Household Debt and Credit Report for the second quarter of 2024 shows that household debt in the U.S. is at $17.80 trillion, up $109 billion from the previous quarter.

This increased reliance on debt comes as no surprise on the heels of the highest inflation rates in over 30 years. Consumers are feeling the pinch in their pockets as everyday goods and services have become more expensive.

While this may seem overwhelming, it helps to know that trained professionals can help you dig out of debt faster. Consumer credit counselors analyze your income, expenses, total debt exposure and credit reports to create a workable solution to get out of debt.

Before settling on credit counseling services, it’s important to know what to expect and how to find the service that matches your needs. This guide will cover everything you need to know to find the right credit counseling service.

What is credit counseling?

Credit counseling involves working with an agency that will take a detailed look into your finances and make recommendations to help you get out of debt. This strategy can help you take control of your finances if you find yourself in a tight financial situation due to overwhelming debt payments. The agency can help you solve debt-related issues by connecting you with additional resources or designing specific plans to help you pay back your creditors.

How does credit counseling work?

If you pursue credit counseling services, you’ll meet with a credit counselor for an initial counseling session and share some basic details about your financial situation. These may include your income, current debts and monthly expenses.

Once they know where you stand financially, the counselor will likely suggest a debt management plan or an alternative option. With a debt management plan (DMP), you can lock in lower interest rates with your creditors and get out of debt faster than you would if you simply made minimum monthly payments. They may also help you design a budget and point you toward money management education and other resources.

If your counselor can’t assist you with a DMP, they may refer you to other professionals to discuss options such as tax debt solutions, student loan relief, consolidation loans or bankruptcy.

Why should I apply?

You may want to apply for credit counseling for several reasons, such as:

• You’re overwhelmed with debt: When you have too much debt or too many payments, cash flow challenges may leave you vulnerable during a financial emergency.
• You want to improve your financial situation: If your credit score is low, you may be able to improve it through arrangements with lenders.
• The cost of your credit: Some credit types come with higher fees and interest rates. Counseling can help you pay off the most expensive debts first and save money over time.
• You lack financial direction: Consumer credit counseling services provide you with financial education and a plan that simplifies your financial journey.

You may uncover money problems you never knew you had, allowing you and your counselor to develop a suitable budget that will help you pay off debt sooner than you’d be able to on your own. If you opt for a debt management plan, you could save thousands of dollars in interest.

The difference between debt counseling and debt settlement

When looking into counseling services, it is important to have an accurate idea of what these services can and cannot offer. While a debt settlement agency offers debt counseling, a debt counselor doesn’t offer debt settlement.

Debt settlement is viewed negatively by lenders because you’re ultimately paying less than what you owe. As a result, settled accounts are considered a derogatory mark on your credit report.

Debt counselors, on the other hand, don’t settle accounts for a lower amount. Instead, they work with lenders to lower interest rates for reduced payments.

Types of credit counseling services

Credit counseling organizations offer several services, from budgeting to bankruptcy counseling. Knowing the differences between these services can help you determine the best fit for your needs.

General budgeting

A credit counselor can help you through general budgeting techniques. A credit counselor often offers a free initial session, typically an hour long, to cover your financial goals and current financial practices. Budgeting conversations will also include going over your income and expenses. You may be able to obtain additional budgeting counseling sessions beyond this first one.

General budgeting education can also involve financial education workshops. Not everyone knows how to draw up a workable budget, choose the right financial products or manage their finances effectively. These workshops aim to improve attendees’ financial decision-making and planning.

Once you have paid off some of your debt, a debt counselor may also help you identify long-term financial strategies.

Debt management

A credit counselor creates a plan to consolidate your debts and lower the interest rate, typically by calling your creditors and negotiating with them on your behalf. Once negotiations are done, your credit counseling agency will set your new monthly payment. Instead of making multiple payments to different creditors each month, you’ll make one monthly payment to your credit counseling agency, which will then distribute your payment to your creditors on your behalf.

Typically, a credit counselor will create a DMP to help you erase the debt over three to five years. However, timelines can vary depending on your unique situation and the agency helping you.

Bankruptcy counseling

Bankruptcy is a legal proceeding filed in the United States Bankruptcy Court that can either absolve you of certain types of debt or otherwise reorganize your debt to be more manageable. Bankruptcy counseling gives you two financial education sessions: one before you file for bankruptcy and another when your debts are discharged.

Student loan counseling

If you are having trouble repaying your student loans, you might look to a credit counselor for information on repayment options. A counselor can help facilitate conversations with your student loan issuers to reduce your interest rates or consolidate your loans if it makes sense to do so.

Housing counseling

If you’re having trouble paying your mortgage or rent, you may be able to find the help you need through housing counseling. Some counselors can help you avoid foreclosure, while others answer your questions about buying a home.

Housing counseling can also help renters by identifying affordable units, providing information on tenants’ rights and fair housing practices and connecting clients with community resources. Housing counseling can also give general advice about budgeting your rental payments with other essentials.

Organizations that offer credit counseling

Two types of entities typically offer credit counseling services: nonprofit organizations and for-profit debt management companies. The best fit for your needs will depend on your overall goals for handling your debts.

Nonprofit agencies employ counselors who have extensive training in debt management, particularly when it comes to the consumer credit industry.  These professionals typically have certification from the National Foundation for Credit Counseling (NFCC), National Association of Certified Credit Counselors (NACCC) or another body that is approved by different creditors in the United States. These organizations can give you insight on how to manage your money and debts, and they will usually offer free educational materials and workshops.

Certification standards vary by organization, but it typically entails an exhaustive course on counseling techniques, credit-related laws and regulations and material about basic financial literacy.

An initial counseling session typically lasts an hour. While many nonprofit agencies offer free sessions, it’s worth noting that individual counselors can sometimes charge a fee for their services. You can also take advantage of follow-up sessions, and the credit counselor may create a debt management plan for you.

While this DMP might not get your creditors to lower the amount you owe, you may be able to make your payments more manageable with lower interest rates. Some creditors will refuse to work with credit counselors, so it’s best to have your credit counselor set the proper expectations with you before beginning your DMP.

Nonprofit consumer credit counselors are usually certified, and their services cost less than those offered by for-profit credit counselors. Before you sign up with a nonprofit debt counseling service, be sure to check that it’s legitimate. Nonprofits in this category have a 501(c)(3) status, which you can check with the Internal Revenue Service (IRS). You can also confirm they’re registered with the NFCC or the Financial Counseling Association of America (FCAA).

How to get started with credit counseling

If you’ve decided that credit counseling is right for you, then it’s time to make a plan. You can start by gathering all of the information you have on your finances to better prepare for your meeting with a counselor. This will include making note of:

• Every type of debt you owe and how much you owe
• Which creditors do you owe and whether you’ve tried to negotiate with them on your own before
• Your monthly income
• How much you typically spend in a month

Next, you’ll want to find a certified credit counselor from an accredited nonprofit credit counseling organization. Remember to search the databases from the National Foundation for Credit Counseling and the Financial Counseling Association of America for more information about counselors in your area. For those looking for housing counseling specifically, a good place to start might also be with a counseling agency sponsored by the U.S. Department of Urban Housing and Development.

The bottom line

Credit counseling can make a substantial difference in your financial situation under the right circumstances. If you’re feeling overwhelmed by financial decision-making or burdened by insurmountable debt, it’s important to seek assistance as soon as possible.

Before appointing a credit counselor, vet the agency to make sure you’re dealing with an accredited firm staffed by certified credit counselors. Shop around to find the credit counselor fit for your personal needs.