If you’re looking for ways to manage or reduce debt, you might come across the term “credit counseling.” This service helps people understand their financial situation, make realistic plans to repay debt, and learn how to avoid future debt problems.
Credit Counseling Defined
Credit counseling is a service designed to help people manage debt and improve their financial habits. Nonprofit agencies usually provide it, and many offer sessions at little or no cost.
A certified credit counselor can review your income, expenses, and debts to create a personalized plan. Some agencies also offer a Debt Management Plan (DMP), which combines multiple debts into a single monthly payment. This plan may include lower interest rates or waived fees, depending on your creditors.
Only credit counseling agencies approved by the U.S. Department of Justice are authorized to provide bankruptcy counseling. You can find a list of approved agencies on the Department of Justice website.
How Can Credit Counseling Help?
Credit counseling can help you manage debt more confidently and plan for your future. Here are some common ways it helps:
- Debt management support: If you enroll in a DMP, your counselor will work with creditors to combine payments into one monthly bill.
- Education and budgeting: Many agencies focus on teaching financial skills, including how to build a budget and manage credit responsibly.
- Lower interest and fewer fees: Creditors may agree to reduce rates or waive late fees when you join a DMP.
Credit counseling can also prepare you for financial goals like buying or keeping a home. For many people, the biggest benefit is learning the tools to stay out of debt long-term.
What Can Credit Counseling Not Do?
Credit counseling is helpful, but it’s not a quick fix. It can’t reduce the total amount you owe. Instead, it helps you repay your debt more efficiently.
A few important limits to keep in mind:
- No debt forgiveness: You’re still responsible for paying what you owe, though you may pay less in interest and fees.
- Possible monthly fees: Some DMPs charge a small administrative fee.
- Not all creditors participate: Some lenders might not agree to the proposed terms.
While these programs can make debt more manageable, they’re not a form of debt reduction or settlement.
Alternatives to Credit Counseling
If credit counseling doesn’t fit your needs, there are other ways to deal with debt. Each option has its own risks and benefits.
Debt Consolidation Loans
A debt consolidation loan lets you roll multiple debts into one new loan, ideally with a lower interest rate. You’ll make one monthly payment instead of several.
The upside is convenience and potential savings on interest. However, approval depends on your credit score, and you may pay loan fees. Unlike a DMP, you’ll handle payments yourself and won’t receive ongoing financial education.
Debt Relief Programs
Debt relief programs, offered by companies like National Debt Relief, are different from credit counseling. Instead of managing repayment, these companies negotiate with your creditors to settle your debt for less than the full balance.
If a settlement is reached, you’ll pay the agreed amount, and the rest of your debt is forgiven. Debt relief can significantly reduce what you owe, but results vary. Creditors don’t have to accept offers, and your credit may take a temporary hit during negotiations.
Warning signs to avoid:
- Promises to “fix” or quickly improve your credit score
- Guarantees of a specific amount of savings
- Requests for upfront payments before a settlement is reached
Only work with reputable companies that are transparent about their fees and process.
Bankruptcy
Bankruptcy should be a last resort, but it can offer a fresh start if you can’t repay unsecured debt. It can erase some debts but may require giving up certain assets and will affect your credit for years.
Federal law requires credit counseling before filing for bankruptcy and a debtor education course afterward. These steps are designed to help you better manage your finances once your case is complete.
Final Thoughts
Credit counseling can help you understand your financial situation, create a repayment plan, and build better money habits. It’s not a quick solution, but it can be a valuable first step toward long-term financial stability.
If you’re unsure whether credit counseling, debt relief, or another option fits your situation, take time to research each path. The right approach depends on your goals, budget, and how much support you want while paying off debt.
