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What Is Credit Counseling? (And Can It Actually Help?)

Credit counselors are certified professionals who can help you develop a debt management plan.

What is Credit Counseling? (And Can It Actually Help?)
Christy Rakoczy
Harrison Pierce
By Christy Rakoczy
and Harrison Pierce
Becca Borawski Jenkins
Edited by Becca Borawski Jenkins
Updated Dec. 17, 2024
Fact checked

If you’re struggling to make ends meet and have fallen into debt, you aren’t alone. According to the Federal Bank of New York, total household debt increased by $147 billion in the third quarter of 2024, with 3.5% of outstanding debt in delinquency. Fortunately, credit counseling agencies can help you manage your money and debt, budget, and monitor your credit. However, many services will cost you.

Although it might seem counterintuitive to add a bill to your monthly budget to pay a credit counseling agency, the benefits can outweigh the price if the alternatives are falling deeper into debt or declaring bankruptcy. Plus, these agencies might have existing relationships with lenders and may negotiate repayment terms, interest rates, and late fees on your behalf (though you shouldn’t count on these results). We’d recommend credit counseling to anyone who feels like they’re drowning in debt and wants to make a concrete plan to tackle it.

What is credit counseling?

Credit counseling is a service that some nonprofit agencies provide to help people facing financial struggles. These organizations typically perform a wide variety of tasks designed to help you more effectively manage money and cope with debts. This is considered a type of debt relief.

Although credit counseling services can differ by agency, here’s what you can expect when working with a counselor.

Services credit counselors provide

Setting up debt management plans (DMPs)

A debt management plan (DMP) is one of the focuses of what credit counseling agencies do. However, this isn’t the only service these organizations provide, and this won’t be the right solution for everyone.

When you set up a DMP, you get a repayment schedule — typically between three and five years — with monthly payments based on your budget. Under one of these plans, you’ll shift from making payments directly to your various creditors to making one payment to the credit counselor. The counseling agency then distributes money to your creditors on your behalf.

Typically, a debt management plan or program will not reduce the total balance you owe (debt settlement plans do that). Instead, the credit counseling agency may negotiate with creditors to lower your interest rate, provide a longer payoff time, or reduce fees to lower your costs. However, none of these outcomes are guaranteed — and you should never work with an agency that tries to force you into a DMP without talking to you about your situation.

Warning
 Credit counseling agencies typically charge a monthly fee (typically around $50 or less) for DMPs. We know this isn’t ideal, but the cost of lugging debt around for years can be far, far greater. A monthly fee may be worth it if it gets you out of debt much sooner than you could on your own.

Reviewing credit reports

Credit counseling agencies often help you obtain a free copy of your credit report and score so you can keep tabs on how your debt payoff efforts are affecting your credit history. Some agencies will review your report with you so you can understand the factors affecting your score.

Budgeting help

Credit counselors will commonly teach you how to budget. Budgeting where your money should go can help you identify places where you might be able to make spending cuts to make paying off your debt more manageable. They might suggest specific tools, like budgeting apps, or help you weigh the advantages and disadvantages of different budgeting strategies.

Providing financial education

Many agencies also offer free financial education, including reading materials and workshops designed to teach you about various aspects of money management.

What types of debt can credit counseling help with?

Credit counseling services can help consumers with most types of debt, although a DMP generally includes only unsecured debts. For secured debt, such as mortgages and auto loans, credit counseling agencies might be able to offer other types of assistance.

Here are some of the different kinds of debt counseling these companies may be able to assist you with:

Is credit counseling right for you?

Credit counseling isn’t for everyone but can be a viable option if you’re overwhelmed with debt. Having a professional help you develop a course of action to repay your debt can make it seem more manageable and may translate to better terms (if you go with a DMP). But we want to be crystal clear that credit counseling won’t get rid of your debt or “fix” your credit — it just might make you feel better equipped to do these things yourself.

If you’re looking for help budgeting, creating a DMP, and/or educating yourself about your financial health, we might recommend credit counseling. Just be sure to thoroughly research agencies before signing any agreements or paying for services.

How to find a trustworthy credit counseling agency

To find a credit counseling agency you can trust, check with the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA). These organizations provide lists of reputable and certified counselors. You can also contact your state attorney general’s office or consumer protection agency to find out if an agency is legitimate.

According to the Federal Trade Commission (FTC), most reputable credit counseling agencies are nonprofits. However, the FTC also warns that customers can't assume every nonprofit credit counseling agency is good, as some still charge very high fees or worsen your situation.

A stand-up agency should be willing to provide a free consultation, at the very least, and shouldn’t immediately suggest a debt management plan without asking about your needs. Carefully read over materials and compare services and fees before submitting an application.

Alternatives to credit counseling

Credit counseling is one of several options if you're struggling with debt. Here are a few things you can do on your own before contacting a credit counseling agency.

Negotiate with creditors

You can try to develop a repayment agreement on your own. This would allow you to avoid fees, but you'd have to do a lot more legwork.

To negotiate credit card debt, for example, you would need to contact your credit issuer(s), explain why you’re having trouble repaying your balance, and make your case for reducing your total debt, interest rate, or monthly payment. Workout agreements, lump-sum settlements, and hardship agreements are a few potential outcomes.

Debt consolidation

If you’re battling high-interest debt, consider taking out a debt consolidation loan. You use the funds you receive when you take out a consolidation loan to pay off your balances from other loans and/or credit cards, and then you make one monthly payment on the new loan.

Pro tip
Personal loans aren’t the only way to approach debt consolidation, but they’re often one of the most cost-effective thanks to relatively low fixed APRs and long repayment terms. You could also use a balance transfer credit card with a 0% intro APR offer if your credit is in good enough shape to qualify and you can make a big dent in your debt during the promotional period.

Debt settlement

Debt settlement is an agreement between you and the lender that you can pay back less than the full balance. You can do this yourself or hire a debt settlement attorney or service to negotiate on your behalf. This can damage your credit but can also result in paying back much less money over time. Note that you might need to pay a debt settlement agency a fee that is a percentage of the debt settled.

File for bankruptcy

Bankruptcy should always be a last resort. We recommend exploring every possible option before filing for bankruptcy, as it can have long-term financial consequences (and stay on your credit report for up to seven or 10 years). However, it is sometimes the only way to erase your debt if you owe far more than you can reasonably repay.

FAQs

What does a credit counselor do?

A credit counselor helps you more effectively manage your debt. The centerpiece of their services is often the negotiation of a debt management plan. Your counselor might get creditors to agree to a longer payoff time, reduced fees, or a modified payment schedule to make repayment more affordable.

Is credit counseling expensive?

Fees for credit counseling can vary from one company to the next. Legitimate companies often charge an affordable monthly fee. They can provide savings in other ways, such as negotiating with your creditors to reduce your interest rate or waive other fees.

What is the difference between debt consolidation and credit counseling?

Debt consolidation typically involves taking out a new loan to repay multiple existing debts. It results in one monthly payment if you pay off all your old debt with your new loan. And if you qualify for a new loan at a lower interest rate, you can save money on debt payoff. On the other hand, credit counseling involves finding a way to simplify debt repayment by entering into a debt management plan overseen by your counselor.

Bottom line

Credit counseling can help you streamline debt payoff, reduce monthly payments, and get in control of your finances. It could also include education about budgeting and handling your monthly expenses. If you decide to work with a credit counseling agency, carefully research to find a certified credit counselor with a legitimate agency.

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