Credit Counseling

Credit Counseling

How Credit Counseling Can Work For You.

Many consumers find resolving overwhelming debt to be a complicated process, and frequently are confused by many debt relief terms including credit counseling.

No, there is not a psychologist giving your credit cards counseling. In fact it is the consumer whose behavior is the subject of change.

With such a large variety of debt solutions available to consumers, the differences between them can be confusing. At, we help eliminate that confusion by providing quality information. We help you simplify the process of understanding your different options for getting out of debt, and make learning about credit counseling a little easier.

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Credit Counseling at a Glance

Not everyone with debt faces the same issues. Consequently, no one solution is right for everyone. Working with a Consumer Credit Counseling Service (CCCS) is one possible solution or approach to getting out of debt. Like any other debt resolution technique, it has positives and negatives. In the video we will provide an overview that discusses how credit counseling works, the debts eligible and ineligible for CCCS, its advantages and disadvantages, and the costs involved. Other resources cover other debt consolidation options that are alternatives to credit counseling, CCCS Â scams, non-profit credit counseling, and frequently asked questions about credit counseling.

Credit counseling programs start by taking a broad snapshot of your financial picture. After you select a CCCS provider, you and your personal credit counselor conduct a thorough financial review. You go over your total household income and expenses, to determine the appropriate balance between your fixed living expenses and paying down your debts.

Credit Counseling and Setting a Budget

As part of your financial review, your counselor helps you establish a budget. The goal is to trim unnecessary expenses where possible, so you live within your means. This budget counseling will not only help you achieve debt freedom, but also helps you establish spending and saving habits that will prevent you from falling into debt again.

Debt Management Plan

The next step is often for the counselor to propose a plan to help you realize your financial goals, use credit more wisely, and to manage your money more effectively. The credit counselor may suggest a formal Debt Management Plan (DMP_ that is tailored to your specific debts and aims to work out more favorable terms with your creditors.

It is not required that you work with the credit counselor to set up a Debt Management Plan. You may decide that the budgetary counseling is all that you need. However, if you are struggling with debt, especially high-interest credit cards, it makes sense to see whether a DMP will help you.

In a DMP, a CCCS firm works with your creditors to obtain interest rate concessions. A lower rate means that your monthly payment dollars go further; less of your payment goes to the interest charges and more is devoted to paying down your principal balances.

In a CCCS Debt Management Plan, you stop paying your creditors directly. Instead, you send one payment to the CCCS and the service sends payments to your various creditors. You continue to receive monthly statements from your creditors, allowing you to monitor your progress with first-hand information from each creditor.

Customarily, consumers sign up for credit counseling programs to get help with high-interest rate credit cards, which are the hardest to pay off. Because a credit counseling program’s Debt Management Plan cuts your interest rates, your time to debt freedom is reduced.

You are not required to enroll all unsecured debts in the credit counseling program. However, if one have more than one credit card with the same card issuer, then you must choose to enroll all or none of them. You must stop using your credit accounts that you enroll in the Debt Management Plan, but are free to use other accounts you don’t enroll.

It is a standard recommendation, however, to cease using your other accounts and even to close all but one that reserve only for emergency or for specific uses that require a credit card, such as renting a car, making a plane reservation, or booking a hotel room. Any card that is used should be paid off in full the following month.

The reason it is often advised that you close all accounts, aside from a single emergency account, is that your goal in working with a credit counseling service’s Debt Management Plan is to get out of debt. Your goal of debt freedom will not be achieved, if you are running up debt on accounts not enrolled in the Debt Management Plan. Your Debt Management Plan is an opportunity to reform the way you use credit and to establish better money management habits.

Eligible Debts in Credit Counseling

Not all debts are eligible for enrollment in a credit counseling service’s Debt Management Plan. Eligible accounts are unsecured credit accounts, such as standard credit cards, unsecured personal loans, department store charge cards, certain collection accounts, and some financed medical accounts. Other medical bills, old cell-phone or utility bills, and bank overdraft protection accounts are not usually allowed.

Secured debts, such as your home mortgage or your auto loan are not eligible for enrollment. Student loans may be eligible for inclusion in a Debt Management Program, depending on the provider, but it will not reduce your interest rate on your loan.

Credit Counseling Costs

The fee for most credit counseling services varies and can range significantly. Some credit counseling services charge an enrollment fee that can run as high as $75. You may also be charged monthly fees ranges. Monthly fees can be a flat fee or based on the number of accounts you enroll.

There are caps on the monthly fees and the enrollment fee. The caps are regulated by the states and vary from state to state. As a rule of thumb, your CC fee plus your creditor payments should be less than what you’re paying your creditors today.

Some credit counseling services ask you for a "voluntary contribution." A voluntary contribution is a way to try and extract money from you that skirts state fee limits. Choose not to give a voluntary contribution and ask if you will receive inferior service for not contributing. If the answer is "yes," then find a different credit counseling service provider.

In most Debt Management Plans, credit card issuers underwrite part of the cost in a system of payments to credit counseling companies called "fair share." The typical fair share percentage was 15%, meaning that credit counselors received 15% of all money they paid to creditors on behalf of their customers. However, the average fair share dropped to 6% in recent years, and some banks stopped fair share payments altogether.

Some financial experts see the counselors’ reliance on "fair share" as a conflict of interest between the credit counselors’ obligations to their consumer clients and their need to please credit card lenders, which provide the majority of many agencies’ revenue. Although the use of "fair share" is nearly ubiquitous among credit counseling agencies, its continued use led to sharp criticisms of the credit counseling industry.

It may seem strange for banks to pay credit counseling companies and encourage credit counseling, but it is in the credit card issuers’ financial interests to do so. Debt Management Plans help banks’ bottom lines by keeping financially stressed consumers away from bankruptcy and continuing to make their monthly payments. Even if the interest rate is reduced in a credit counseling Debt Management Plan, the consumer still repays the entire principal plus some interest.

Credit Counseling Advantages

Like everything in life, Consumer Credit Counseling Services have pros and cons. CCCS can help you improve your financial know-how. The budgetary review and educational materials will help you examine the big financial picture, define your goals, and establish a workable plan to reach become debt free and to avoid falling back into debt again.

A credit counseling Debt Management Plan will lower your interest rates and may reduce your overall monthly debt payment. It will help you get out of debt sooner, at a lower cost than continuing to pay your creditors the current interest rates. You will not receive collection calls while in the program. Creditors will receive a monthly payment, so you avoid dealing with aggressive bill collectors.

Credit Counseling Disadvantages

There are two primary disadvantages to credit counseling Debt Management Programs:

  1. High Dropout Rate. As many as 75% of clients who enroll in a Debt Management Program do not complete the program. The primary barrier is that the monthly cost of the program is almost as high as the payments you are making to your creditors on your own. Despite a desire to put the problem behind you, you may find that you can't afford to see the credit counseling debt management program through to completion.
  2. Credit Rating Impact. Although credit counseling does not necessarily impact your credit score, you should be aware, however, that enrollment in a credit counseling program is perceived by some lenders the same as if you had filed for a Chapter 13 bankruptcy. That makes it unlikely to find a loan during credit counseling program. Even if you get a loan, it will come with a very high interest rate.

The credit counseling provider sends payments to each creditors during the credit counseling program, However, during the transitional time a Debt Management Program is being set up and interest rate reductions are being negotiated by the credit counseling service, the consumer may have to send a payment to both the credit counseling program and his or her creditors. If you can't afford to do this, your creditors may not receive payments on time, which will harm your credit rating. See the resource Credit Counseling and Credit Repair to learn more.


Credit counseling programs can benefit you. They can be a good source for financial education materials and information. The Debt Management Plans offered can lower your interest rates and speed up the time it takes you to get out of debt, saving you money. Make sure you can afford the payment the debt management plan requires, usually about 3% of your total debt each month, before you commit to the program. A Debt Management Plan will not help you resolve your debt problems if you don't complete the program.

Consult with a reputable credit counseling program if you:

  • Are not making any progress in paying down your debt
  • Have high-interest credit card debt
  • Want to protect yourself from aggressive creditor collection actions
  • Don't want to go delinquent with your creditors


ttoni falconni, Aug, 2011
I have read quite a few articles on this subject and am surprised at the knowledge depth of this article. How is credit counseling better than debt settlement? After reading about debt settlement and debt consolidation ,it seems it is a much faster choice, are other sites wrong?
BBill Admin, Aug, 2011
There are pluses and minuses to each approach. It is a matter of deciding what is most important to you. Also, debt settlement is for someone in a financial hardship.

Without knowing more about your situation (income, assets, debts, interest rates, etc.), I can't make a specific recommendation. Try out the free Debt Coach tool, which will look at your credit report and goals and lay out various options for you.
MMarrico Dom, Aug, 2011
how do i know which is a reputable credit couns. company?
BBill Admin, Aug, 2011
There are a number of ways to assess quality and reputation of debt relief providers, but most of all we would always recommend shopping around. If you have one firm in mind, I would start by looking for the length of history and how long they have been in business. You do NOT want a fly by night firm handling something as important as credit counseling. Next, look to see if they are members of the leading industry groups (credit counseling leaders are frequently in the NFCC, debt settlement firm leaders are typically in AFCC). Lastly, look at the Better Business Bureaus and state licensing agencies to make sure that they are licensed in your state. But again, apply with a few firms and compare their ethics, approach, fees and how they handle your specific case. It's a big decision so choose wisely. Good luck, and know that you can always apply through if you like.
TTony Esperanz, Aug, 2011
Great picture of a credit counselor :) That looks a lot more soothing that talking to my credit counseling guys.
TThomas I, Feb, 2011
I heard that credit counseling firms get paid by the credit card companies. Isn't it a conflict of interest that they receive money from both the credit card companies and from people who are trying to get out debt?
BBill Admin, Feb, 2011
With most credit counseling services, part of the cost is underwritten by the banks that issue credit cards in a system of payments to credit counseling companies called "fair share."

While it may seem strange that banks would pay credit counseling companies, remember that credit counseling programs help the banks’ bottom line by allowing some financially stressed consumers to continue making payments on a regular basis, while steering them away from bankruptcy. Historically, the typical “fair share” percentage was around 15%, meaning that credit counselors received 15% of all money they paid to creditors on behalf of their customers. However, this average fair share has dropped to around 6% in recent years, as many banks have reduced their fair share payments, and some have stopped them altogether.

Some financial experts see the counselors’ reliance on “fair share” as a conflict of interest between the credit counselors’ obligations to their consumer clients and their need to please credit card lenders, which provide the majority of many agencies’ revenue. In my view, if the 'fair share' is disclosed, I see no conflict of interest. It is more important to me what kind of results the credit counseling programs will deliver than how they are compensated. I focus on the program's out-of-pocket costs and fees and the savings the program delivers.