Credit Counseling Guide 2025
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Credit counseling is a professional service to help analyze your financial situation. Credit counseling agencies offer several services, including a debt management plan that consolidates your monthly credit card payments into one lower interest rate payment.
Best Credit Counseling Agencies
What's inside this article
- What is credit counseling?
- Services offered by credit counseling agencies
- How to choose a credit counseling agency
- Why choose consumer credit counseling services?
- Credit counseling pros and cons
- Debt management plan - A credit counseling service
- Debt management vs other debt consolidation alternatives
- Frequently Asked Questions - Credit Counseling
What is 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.
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 helps you establish spending and saving habits that will prevent you from falling into debt again.
As a final part of their service, your credit counselor reviews your debt consolidation options, including a debt management plan offered through their credit counseling agency.
Services offered by credit counseling agencies
The main debt consolidation service that credit counseling agencies offer is a debt management plan. In addition, they offer educational and counseling services including:
- Budget counseling: The first session reviews your overall financial picture including income, expenses, assets, debts, and financial goals. The initial session is free and takes about an hour to complete. Your credit counselor will review your debt consolidation plans and see if you can benefit from additional budget counseling or a debt management plan.
- Bankruptcy counseling: Bankruptcy counseling is required before filing bankruptcy and before discharging your debts. The pre-bankruptcy session reviews your financial situation and if bankruptcy is your best option.
- Housing counseling: Credit counseling agencies offer a variety of services for homebuyers, homeowners struggling with payments, and reverse mortgage borrowers. Some of the courses are mandatory for various mortgage lending programs.
- Student loan counseling: Credit counseling agencies offer a two-tier approach to student loans. The first tier analyzes your student loans and possible repayment plans. In the second tier plan, the counselor reaches out to your student loan servicers for information and evaluation of plans.
- Debt management plan: After reviewing your budget and considering your debt consolidation options a counselor might create a debt management plan, which lowers your credit card interest rates and consolidates your monthly payment so that you pay off your debt between three to five years.
Most credit counseling companies have free information and tools about budgeting and dealing with debt.
How to choose a credit counseling agency
Dealing with debt is stressful. Make sure that you choose a reputable credit counseling agency and that you are comfortable confiding in your credit counselor. . When choosing a credit counseling agency, look at the following features:
Accreditation: A non-profit organization generally offers credit counseling; however, that is not a prerequisite nor a guarantee that it is a reputable company. When choosing a credit counseling firm, look for membership in the National Federation of Credit Counselors (NFCC) or The Association of Independent Consumer Credit Counseling Agencies (AICCCA).
Fees: Most credit counseling services have similar fees. Your initial consultation and financial review are free with most credit counseling services. If you are quoted a fee, look for another service. Many programs offer financial education materials for free, too. Credit counseling service fees are capped by state law. Debt management programs are the main source of fees for credit counseling companies. There are two types of fees you will be asked to pay. Enrollment fees range from $25 to $75 per month, depending on the state. Monthly fees should not be more than $50. Your fees should be fully disclosed and easily read on the monthly statement the credit counseling service sends you.
State licensing: Check whether the firm is licensed in your state.
Availability: Most credit counselors offer services through the telephone, internet, or in-person meetings at local offices.
Why Choose Consumer Credit Counseling Services?
Here are the main benefits of credit counseling:
Get professional assistance Do-it-yourself solutions, while worth exploring, are tough to accomplish. You can try to lower your own interest by speaking with your creditors, but a credit counseling service will lower your high-interest debt. Your high-interest credit card debt is just the kind of problem that credit counseling works best on. The Consumer Credit Counseling Service will give you a defined plan, so you know exactly when you will be debt-free if you follow the plan.
Reduce your stress: Working with a quality Consumer Credit Counseling Service will reduce your stress. You will benefit from the free financial and budget review.
Protect your credit score: If your score is too low to qualify for a debt consolidation loan or balance transfer, and you don't want to harm your credit score, consider a debt management plan. Make sure that no payments are missed in the initial phase when your DMP is getting set up.
Create an affordable payment: You have a good income, are making your payments on time, and may even reduce the required monthly payment slightly in the DMP. Not being able to afford the monthly payment is the biggest cause of dropping out from a Consumer Credit Counseling Service. As many as 75% of customers enroll drop out, mostly due to committing to a payment that they can't make.
Get out of debt faster: By avoiding minimum or late payments, you set yourself on the road to paying off your debt. You probably can accelerate your DMP because the monthly DMP payment should be smaller than the payment you are making to your creditors. If you can free up any more money during the program (money you use for a car payment that ends, for example), you can finish the program even faster.
Credit counseling pros and cons
Consumer Credit Counseling is one of the debt relief alternatives available to you if you are struggling with debt and looking for help. Like other debt relief solutions, credit counseling is right for some people and situations, but it is not a one-size-fits-all solution.
Here are some of the pros and cons of a credit counseling program:
Pros:
- Lower interest rates and save money
- No harassing collection calls
- Affordable monthly payment
- Late fees waived
- One monthly payment
- Easy to understand the plan
Cons:
- Possible negative impact on credit
- Accounts are frozen
- Negative effect on applying for credit during the program
- Hard to complete
- You must enroll all eligible debts
Debt management plan - A credit counseling service
If you are struggling with your monthly credit card payments, you need some debt relief. After completing a free evaluation and possibly a credit counseling course, your credit counselor might recommend a debt management plan.
The debt management company negotiates lower fees and rates with your creditors. You make one payment to the debt management company, which then funnels the money to your creditors. You will pay back all of your enrolled debt in a debt management plan for over five years. Credit counseling has regulated upfront and monthly fees. Debt Management companies take monthly fees for their services.
Remember, credit counseling and a management plan are only one debt consolidation options, and a good credit counseling firm will help you make a decision.
Debt management vs. other debt consolidation alternatives
When considering which debt consolidation alternative, there are a few basic factors to consider, including your credit score, income, and assets. Here are a few guidelines:
- If you can afford your payments and have good to excellent credit, consider a balance transfer or a debt consolidation loan.
- If you are struggling and need debt relief, consider a debt management plan or a debt settlement program.
However, don't only rely on a credit counselor to make your decision. You can get free debt consolidation loan quotes, credit card offers, or debt consultations with most companies.
Check out the comparison table below to see how credit counseling and debt management match other debt consolidation solutions.
Comparing qualification criteria and benefits: Credit counseling vs. personal loan vs. debt settlement
| Personal Loan | Debt Settlement | Debt Management Plan | |
|---|---|---|---|
| Qualification criteria | |||
| Minimum Debt | Loans between $1 - 100K | $7500+ in Unsecured Debt | $2500+ in Unsecured Debt |
| Credit Score | ✕ High-Interest Rates for Bad Credit Loans | ✓ No credit requirements | ✓ No credit requirements |
| Benefits | |||
| Debt Principal Reduction | ✕ Pay principal and interest | ✓ Principal reduction negotiated | ✕ Pay principal and interest |
| Monthly Debt Payment Impact | ✕ Payments Increase | ✓ Payment Reduce | ✓ Some Payment Reduction |
| Credit Score Impact | ✓ Positive | ✕ Negative | ✕ Moderate Negative |
| Avoid Collection Calls | ✓ | ✕ Special programs to deal with collectors | ✓ |
| Avoid Possibility of Litigation | ✓ | ✕ | ✓ |
| Keep Using Credit Cards | ✓ | ✕ | ✕ |
| Typical Program Length | 24-60 months | 24-60 months | 24-60 months |
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Should I select a non-profit credit counseling firm?
Non-profit credit counseling firms do not have a stamp of approval just because they are non-profit. Non-profit refers only to the firm’s tax status. Both non-profit and for-profit firms can charge enrollment and monthly fees. Non-profits get some money straight from the creditors. The IRS has revoked the tax-exempt status of many non-profit credit counseling firms, after finding that many credit counselors claimed IRS tax-exempt status while bringing in large profits, using various means to disguise those profits, and providing executives with excessive compensation when compared with the pay at other, comparably sized, non-profit organizations.
Fees should be comparable between non-profit and for-profit firms. The biggest difference between non-profits and for-profits is that nonprofits receive fair share compensation from the creditors to administer the plan as well as customer-fees. It is more important for you to comparison shop to find the best credit counseling firm you can, than to focus on whether a firm is non-profit or for-profit.
Does every creditor have to participate in the Debt Management Plan?
No, it is possible that some of your creditors may not participate. It could also be the case that your current interest rate with your creditor is lower than the rate that can be obtained by the credit counseling firm. If you are working with an experienced counselor at a quality firm, he or she should know if the creditor participates in Debt Management Plans as well as what interest rate concession the creditor will offer. A quality credit counselor will not recommend a Debt Management Plan unless it is the best solution for you.
How does credit counseling affect my credit?
How your credit will be affected depends on a few different factors, such as your score when you enroll, the number of accounts included in the Debt Management Plan, and whether any payments are made late in the initial portion of the program. The notation on your credit report that your accounts are enrolled in a Debt Management Plan does not lower your score, in and of itself. Your score can suffer, however, because accounts are often closed when enrolled. Closing accounts with a long history hurts your score. Closing numerous accounts can also negatively affect your credit utilization (how much debt you have compared to the size of your credit limits), harming your score.
If you are enrolled in a Debt Management Plan, lenders for auto loans or mortgages are likely to view you as if you are in a Chapter 13 bankruptcy, as both approaches require the intercession of a third-party to resolve the debt problem. Expect a higher interest rate loan if you need a loan while in a Debt Management Plan.
Do I have to enroll all my credit cards in a Debt Management Plan?
No, not every card must be enrolled, although if you are enrolling one card from a specific creditor, then you must enroll every card you have from that creditor. Also, it is a standard recommendation from credit counseling firms that you close all but one account that you can keep for emergency purposes or for renting a car, booking a flight, or renting a car. The goal of the Debt Management Plan is to get you out of debt. The credit counseling program does not want to see you incurring other debt while in the Debt Management Plan, as it will impede your goal of getting out of debt.