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How Credit Counseling Services Work

How Credit Counseling Services Work

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Daniel Cohen
UpdatedMay 22, 2024
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    6 min read
Key Takeaways:
  • Understand how credit counseling services work.
  • Review how credit counseling services are compensated.
  • Examine which debts are eligible for credit counseling.

What Do Credit Counseling Services Do?

Barely getting by? Concerned about debt collectors? Having problems setting up a budget? If any of these apply to you, you may benefit from credit counseling services. Credit counseling services have helped millions of people break the debt cycle. If you're struggling with debt, credit counseling services are one debt relief option that you should carefully consider. Here are some frequently asked questions and answers about credit counseling, to help you learn more and figure out what you can do to become debt free.

What Help Do Credit Counseling Services Offer?

Credit Counseling services break down their programs into two basic parts:

  1. Financial Review- A credit counselor will review your budget, analyze your expenses and income, and make recommendations on how you can save money.
  2. Debt Management Plan (DMP)-If you are struggling with high-interest credit card debt, your counselor may recommend a DMP. In a DMP, the credit counseling service obtains lower interest rates for you from your creditors, so you pay off your debt faster. If you need debt help but your interest rates are not a problem, credit counseling probably won't help you.
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Contact one of's pre-screened debt providers for a free, no-obligation debt relief quote.

Can They Help with All Debts?

Not every debt you have is able to be enrolled in a credit counseling service's DMP. Most credit card debt is eligible, although not every credit card issuer chooses to work with credit counseling services. Unsecured loans and medical bills that are being financed are usually eligible for enrollment. DMPs do not accept secured debts, so mortgages and auto loans are not eligible. Student loans usually aren't accepted either. Tax debts never can be enrolled.

What Does It Cost?

Your initial consultation and financial review is 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. 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

How Are Credit Counseling Services Paid?

There are two ways that most services are paid.

  1. Fees You Pay-The enrollment and monthly fees that are mentioned above. Some credit counseling services ask for a "voluntary contribution." Don't pay it. If you are pressured to make a voluntary contribution, choose another firm.
  2. Fair Share - Most services are actually funded by contributions they receive from your creditors. This is called "fair share" compensation. Many services also receive a portion of the funds you pay into a debt management program. Ask any credit counseling service you are considering to hire for a full and complete disclosure of their funding sources. If you they won't provide the information to you, use a different service.

How Long Does it Take to Complete?

It takes about 4½ to 5 years to complete most DMPs. Your credit counseling service will provide you with a detailed proposal, showing how long it will take to finish your program, given the monthly payment that you agree to make. The exact interest rates that you will pay on each of your accounts will also be listed in your proposal.

Can I be Sued?

If you make your required payments to the credit counseling service, you can't be sued by your creditors. Each creditor is receiving a monthly payment, so you won't face collection efforts, harassing collection calls, or lawsuits.

Does Credit Counseling Affect My Credit Score?

Your credit score does not automatically fall, as payments are made each month. You need to be careful at the beginning of your DMP that there are no late payments when the credit counseling service is working to obtain the creditors permission to reduce your interest rates.

The credit counseling service may require that you close all your accounts that you enroll. Because your credit score takes into account the length of your credit history, closing accounts can harm your score.

While your score will not drop just because you're in a DMP, there is a specific notation made on your credit report that your accounts are "enrolled in a DMP" or "under the management of a third party." If you try to refinance a mortgage or get a car loan when you are in the DMP, most creditors will treat you as though you are enrolled in a Chapter 13 bankruptcy,as both approaches required you to seek outside assistance to resolve your debts.

Are Credit Counseling Services Licensed?

They must be licensed to operate in your state in order to enroll you. Before signing up with a service, ask if they are licensed in your state and if certifications are current.

Are All Credit Counseling Services Non-Profit?

Many are considered tax-exempt non-profit organizations, however not all of them are. If a credit counseling service is non-profit it does mean that it is working harder or cheaper for you than if it is a for-profit organization. Choose a credit counseling service by comparing the fees you are being quoted and the company's history and reputation against other companies, both for-profit and non-profit.

What Risks am I Taking?

The biggest risk in a DMP is that the programs are difficult to complete. As many as 75% of clients who enroll in a Debt Management Program do not complete the program. You have to make the required monthly payment to the program or it won't work.

Many people who are struggling with debt need significant monthly payment relief. While a credit counseling service can save you money over the course of the program, it may not lower your monthly payment enough to help you. If the DMP payment that a credit counseling service quotes you is not one you are confident that you can make, look into debt settlement, a more aggressive debt relief solution, or bankruptcy.

How Do I Avoid Being Scammed?

The fear of being scammed is one factor that keeps many people away from credit counseling. Most credit counseling services are reputable and interested in helping you. As with any industry, there are some bad apples, though.

You may be dealing with a scammer if the credit counseling service:

  • Refuses to send you any information before you meet with them
  • Won't fully disclose its fees
  • Pressures you to sign-up that day or risk losing the deal that is offered that day
  • Recommends a debt management plan before reviewing your finances
  • Doesn't provide budgeting or money management education.

If you are not sure how to solve your debt problems, contact a credit counseling service and hear how they will handle your specific debts. Don't let fear keep you from calling. You are under no obligation to work with anyone who you don't want to work with. At the very least, you should benefit from the free financial and budget review.

Dealing with debt

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Auto loan debt was $1.607 trillion and credit card was $1.129 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%.

The amount of debt and debt in collections vary by state. For example, in Connecticut, 22% have any kind of debt in collections and the median debt in collections is $1427. Medical debt is common and 10% have that in collections. The median medical debt in collections is $490.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.



JJackson, Mar, 2012
I am no longer able to make my minimum payments. I also have two accounts that are about three months late. Will a Credit Counseling Service accept me with this kind of debt?
BBill, Mar, 2012

Having a few delinquent accounts does not disqualify you, automatically, from a credit counseling service. I recommend that you speak with both a credit counseling service and a debt settlement firm. You can get a free quote from a debt relief partner, and hear your options.