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Credit Counseling FAQ

Credit Counseling FAQ
Daniel Cohen
UpdatedFeb 20, 2024
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    8 min read
Key Takeaways:
  • Learn the pluses and minuses to credit counseling.
  • Is a Debt Management Plan your best option?
  • Learn if every creditor must participate in a Debt Management Plan.

Frequently Asked Questions About Credit Counseling & How it Can Help You.

Credit counseling is one solution to resolving a debt problem. Today, many Americans are struggling with debt. According to statistics released by the Federal Reserve in April, 2011, Americans are carrying more than $2.4 trillion in consumer debt! This figure doesn’t include mortgage debt. This high debt, combined with high unemployment, stagnant wages, a rising cost of living, and a drop in housing prices have many consumers feeling squeezed.

If you have a debt problem that you can’t solve on your own, you should look at a credit counseling program to see if it will help you. Review the frequently asked questions about credit counseling below as a first step in examining how credit counseling programs may help you.

How does credit counseling work?

Consumer Credit Counseling Services (CCCS) include budgeting assistance and Debt Management Plans. The budgeting assistance provided is in-depth. The initial consultation lasts an hour or more. Be wary of any firm that tries to give you only general information, without looking at the specific details of your financial situation. During your financial review, you and your counselor will examine your total household income, your living expenses, and your debts, working with you to establish a budget.

If one of your problems is high-interest credit card or unsecured debt, the counselor may recommend a Debt Management Plan. In a Debt Management Plan, the credit counseling program will obtain interest rate concessions from your creditors and potentially get some fees waived (over limit and late fees, for instance). The CCCS takes the single monthly payment you send them and sends the proper amounts to your creditors. Because your payments are consolidated into one payment, credit counseling programs are sometimes mistakenly called debt consolidation programs. In a CCCS, your payment is consolidated, but your debts are still owed to the same creditors.

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.

What are the standard fees?

There are generally two types of fees charged, an enrollment fee and a monthly service fee. Fees can vary from company to company and from state to state. States regulate fees for their residents, placing a cap on both enrollment and service fees. Enrollment fees range from $25 to $75 and monthly fees should not exceed $50.

You do not pay any fees until you enroll. The financial/budgeting review should be free. Many firms tack on a "membership savings plan" or ask for a "voluntary contribution" as well. Basically it is a way to get around the state maximum fee regulations. "Voluntary" means you do not have to pay it, though most consumers do not know that is voluntary and think it's a part of the plan. Some companies will waive fees if your financial hardship is severe.

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.

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.

What are the negatives of credit counseling services?

There are no negatives to the budgetary/financial review assistance that credit counselors supply, if you are receiving individualized information. It costs nothing, but your time and can help you fine-tune your money management skills. "Cookie cutter" or one-size-fits-all advice can be a waste of time.

The primary drawback to a Debt Management Plan is that it may not provide you much payment relief, if you are currently struggling to meet your minimum payment obligations. Your total costs in a Debt Management Plan, including your fees to the credit counseling firm plus your creditor payments should be less than what you are currently paying your creditors, but it may not be small enough for you to afford to meet the required payment every month.

A high percentage of people who enroll in a Debt Management Plan end up dropping out, mainly due to the monthly cost that has to be maintained for the entire 4½ to 5 years it takes to complete the plan. Missing one payment can jeopardize your plan, though it does not necessarily mean you will be dropped as a client. Most programs will terminate you if you miss two or three payments in a six-month period, though you should make every effort to never miss a payment.

The way your credit is affected, as mentioned above, is another negative.

Do my accounts stop accruing interest in a Debt Management Plan?

Generally, no. While some creditors at some times have offered 0% interest rate concessions, that is not the rule. Also, it is common for creditors to require a few payments in the plan before the interest rate concessions are granted. You will receive monthly statements while in the Debt Management Plan and be able to monitor the interest rate reductions and when they take place.

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 debt.

How long should I expect my Debt Management Plan to last?

Debt Management Plans run 4½ to 5 years, though the length of your Debt Management Plan will depend on how much you owe, the creditors you owe, and how much you can afford to pay. Your counselor will be able to give you an estimate after the financial review.

Is a Debt Management Plan my best option?

A Debt Management Plan may or may not be the best option for you. It all depends on your debt load, your interest rates, the size of the monthly payment you can afford to make, and your goals. If you are struggling with a debt problem, it makes sense to review all your available options. has a free tool, Debt Coach, where you can compare all the main options for repaying your debt. Debt Coach is helps you see what you owe, learn about the five possible debt payoff solutions, and find the best way out of debt based on your own unique goals, preferences and situation. Debt Coach assesses complex factors and historical debt payment data for each of the five debt solutions in order to make a personal recommendation for you. Your recommendation includes a monthly payment estimate, an estimated total cost for each approach, and the impact on your credit.

Struggling with debt?

Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Housing debt totaled $12.612 trillion and non-housing debt was $4.891 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

Each state has its rate of delinquency and share of debts in collections. For example, in North Dakota credit card delinquency rate was 3%, and the median credit card debt was $474.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.