Credit Counseling: How Does it Work?

Credit counseling is an option for people who struggle with high amounts of unsecured debt and face severe daily financial stress. Nonprofit credit counseling agencies provide multiple financial services, such as debt management plans (DMPs) and resources to help consumers regain control of their money. They also strive to help people find ways to reduce their debt and, depending on the program, build credit .

If you’re considering credit counseling as a solution to your financial situation, here’s everything you need to know about what it is, who it’s for, how to choose an agency, and what to expect.

What is Credit Counseling?

The main job of a credit counselor is to review your current financial status and develop the best plan to help you get out of debt and manage your money. Most agencies offer consumer credit counseling sessions through various platforms, including online via chat or Zoom, via telephone, or in-person in one of the company’s local offices.

Since credit counseling agencies are typically nonprofit organizations, their services are available at no cost. You may not even realize that the bank or credit union you use offers this service to its customers. Of course, there are for-profit credit counseling agencies out there, and if you go this route, you need to make sure the counselors are properly certified and that the organization itself is reputable. The Better Business Bureau (BBB) is a great place to start when checking out a credit counseling agency.

Credit Counseling and Financial Education

There are several ways credit counseling can help you improve your financial circumstances. They include:

  • Debt counseling.
  • Helping you manage credit card payments and other bills.
  • Improving your financial literacy.
  • Providing an analysis of your current financial health and identifying any problem areas.
  • Creating a budget that works for you and your family.
  • Recommending additional resources and classes that would help you understand and improve your finances for the better.
  • Negotiating with lenders to obtain a lower interest rate will save you money over your loans.
  • Helping consolidate multiple student loan debts and credit card debts into one, more manageable monthly payment.
  • Providing suggestions for first-time homebuyers or renters who need assistance in making their rent payments.
  • Creating a debt management program to help you conquer and eliminate your debt once and for all.
  • Helping you get a copy of your credit report from the three major credit reporting agencies (Experian, TransUnion and Equifax).
  • Helping small business owners separate their business income from their personal finances.

Is Credit Counseling Right For You?

CNBC has reported that money is America’s number one cause of stress . It leads to a lack of sleep and can burden a marriage, among other things.

The Busy Budgeter says credit counseling is a good fit for anyone who is paying 20% or more of their take-home pay toward unsecured debt and finding that making these payments is difficult.

Credit counseling is also ideal for individuals who need accountability, as the counselor will help you learn to be disciplined and stay on track with meeting your goals.

You could benefit from credit counseling if you are worried about your financial situation and don’t have a clear action plan to improve it.

Credit Counseling Success Story

Consider this story posted to Reddit by u:dogfacedandhurt , who fell into debt after the spouse underwent brain surgery. The poster turned to a nonprofit credit counselor for help.

The credit counselor is at a nonprofit and was an absolutely lovely human, so kind, understanding, patient, and supportive. The cards are closed (which was the only contingency to agreeing to this plan) and I’m on a 5 year [Debt Management Plan]. Chase interest is down to 2% and PayPal is 0%. Permanently. There are no late fees for the program, the only thing that will show on my credit report is three closed accounts, and in three years my credit will have skyrocketed AND I’ll be completely out of debt with paying a fraction of that original $1800/month. I honestly can’t believe this is real. I can’t stop crying. I am so happy, so relieved, and I genuinely feel like a million pounds have been lifted off of me. It’s gonna be okay, y’all. It’s actually gonna be okay.

How to Choose a Credit Counseling Organization in 3 Easy Steps

The National Foundation for Credit Counseling (NFCC) is the best place to start looking for a qualified nonprofit credit counseling agency but only after you’ve ruled out that your bank or credit union doesn’t offer this service. The NFCC has been around since 1951. They have a national network of nonprofit member agencies that assist in various programs and services. All financial counselors are certified, and no one who needs help is turned away.

The Financial Counseling Association of America (FCAA) is another well-known agency with reputable counselors. It’s a member-supported 501(c)(3) non-profit national association with a mission to provide consumers with a referral to a financial counseling company that can help them with student loan counseling, bankruptcy advice, debt management, and housing counseling.

When opting for a lesser-known credit counseling agency, you’ll want to only consider companies that have counselors who are accredited by the International Standards Organization (ISO) or by the Council on Accreditation (COA). Next, check to see if the agency is properly licensed and bonded to conduct business in your state.

If the agency you’re considering has the proper certifications, check how long they’ve been in business. You want to go with a company that has already proven itself over seven to 10 years. Check for reviews from other customers who have used the company to determine whether their experience was positive or negative.

Read more: Credit Score in the Dumps? Here are the 9 Best Credit Counseling Services

1. Verify that the Credit Counselor is Certified

When selecting a credit counselor, make sure you choose someone who will give you the proper time and attention you deserve. Any meeting shorter than an hour isn’t enough to look into your financial situation and develop an improvement plan. The counselor should be able to provide you with a personalized budget and not a cookie-cutter printout.

The FTC has a list of questions to ask potential credit counselors (found here ).

2. Check for Agency Warning Signs

Credit counseling agencies that are not legitimate will often have red flags that will warn you against using them. For example, any agency that promises to completely clean up your credit for a set fee is a scam. Improving your credit score takes time, whether you do it yourself or get some help from a counselor (or a credit repair company ). Several factors go into your credit score . Experian points out that one of these factors is the length of your credit history, which makes up 15% of your score. An agency cannot alter the amount of time your accounts have been open and in use.

Another red flag is requesting upfront fees before any services have been provided. InCharge Debt Solutions points out that there is a law against requesting upfront fees and that the Consumer Financial Protection Bureau takes seriously any organization that violates this law.

3. Decide Between Nonprofit vs. For-Profit Credit Counseling

Both nonprofit and for-profit credit counseling agencies offer similar services but are funded differently.

Nonprofit agencies do not make money off of their customers. Instead, they receive funding from another organization, like a bank, credit union, creditor or even the U.S. government. They sometimes charge a very minimal fee to cover administrative costs. But in many cases, the counselor’s services are free to the client.

On the other hand, for-profit credit counseling agencies charge customers directly for their services. They do not receive funding from outside sources. Legitimate for-profit agencies have low monthly service fees, although they may also initially have a one-time set-up fee. For example, Money Management International has an average set-up fee of $34 and an average monthly fee of $24. The company even has a hardship waiver and reduction of fees for individuals who qualify for the discount.

Chances are you need credit counseling because you aren’t able to make ends meet, which makes a nonprofit agency the ideal option. Some would argue that since you aren’t paying the counselor, he or she won’t work as hard for you as a for-profit counselor would. For-profit agencies, however, can get quite expensive, as they often charge multiple fees. If you decide to go with a for-profit credit counselor, review their fee structure before you sign on the dotted line.

Debt Management Plans (DMPs) Explained

A debt management plan is a form of debt consolidation, but you won’t have to take on any new debt. Instead, you will make a single monthly payment to the credit counseling agency, which will use it to pay all of your creditors. A debt management plan typically takes 30 to 60 months to complete.

The credit counselor will also negotiate with your creditors. They will try to get your interest rates reduced and may be able to get better terms. Counselors are experienced at these negotiations and have a high success rate. Many creditors are more willing to negotiate when you are in a debt management plan, as it’s a sign that you are taking action to deal with your debt problem.

You may be required to close credit cards , and your agreement may require you to avoid taking on new debts. Debt management plans are an effective way to get out of debt, but they require some sacrifices and discipline.

The NFCC reports that only 21% of the people who start debt management plans complete them successfully. If you cancel your plan, any concessions negotiated with your creditors will no longer be in effect.

Which Debts aren’t Included in the Debt Management Plan?

Secured debts like a mortgage or a car loan are not usually included in a debt management plan. Your credit counselor will consider these debts when helping you design your overall payment plan, but you will still make the payments directly, not through the credit counseling service.

Most debt management plans focus on credit card and medical debt, but any unsecured debt can be included, like scheduled payments like utilities and rent. Creditors are not required to participate in a debt management plan or offer concessions.

How Will Enrolling in a Debt Management Plan Affect My Credit?

Enrolling in a debt management plan may have an initial negative impact on your credit score. You will probably have to close some credit accounts, which will decrease your credit history length and raise your credit utilization. This could cause a short-term drop. You will not be applying for new credit at this time, so that shouldn’t matter.

If you stay with your debt management plan, you will make your payments on time every month, which is the single most important element in building great credit. By the time you finish your plan, you should see a significant improvement in your credit.

Want to know more about credit counseling? Check out this video.

Want to learn more about how debt management plans work? Check out this video:

Here are 4 Trustworthy Credit Counseling Organizations

The best credit counseling services are those that are fully accredited by the NFCC or FCAA and have great online reviews. Even if they’re not free, they will offer a free counseling session to prospective clients. Also, they won’t use scare tactics or try to pressure you into signing up for anything.

Always check the agency’s online reputation before agreeing to anything official with them. With that in mind, here are a few of the most popular credit counseling services out there (in no particular order):

American Consumer Credit Counseling (

American Consumer Credit Counseling (ACCC) offers debt management counseling, bankruptcy counseling, credit counseling and other financial planning services. They also provide various debt settlement and consolidation services. Plus, they offer financial education resources related to things such as college planning and tax debt.

ACCC is a member of the NFCC and is BBB-accredited with an A+ rating . The organization is based in Massachusetts but is fully licensed and operates across the entire United States, including New York, California, Florida and Oregon.

GreenPath Financial Wellness

GreenPath Financial Wellness is a nonprofit credit counseling agency based in Michigan. It was established in the early 1960s and is run by NFCC-certified credit counselors. The organization is also accredited by the BBB with an A+ rating .

The agency’s mission is to promote financial wellness for everyone within the United States. It does this through debt counseling, debt management plans, bankruptcy support, student loan services, and housing services. It also offers various financial resources, including a financial podcast, credit repair resources, and a free online assessment of your overall financial health.

Like with ACCC, GreenPath provides a free initial credit counseling consultation. During the consultation, a representative works to match each prospective client with the appropriate financial services.

InCharge Debt Solutions

Based in Florida, InCharge Debt Solutions is another nonprofit agency that offers credit counseling to individuals across the country via phone and an online portal. It’s a member of the NFCC and is accredited by the BBB and the Council on Accreditation.

Along with credit counseling, this company provides an array of financial education services, including financial management solutions, housing counseling, debt consolidation, debt forgiveness, and bankruptcy services. It also has online tools and resources on financial literacy, budgeting, and debt management.

Additionally, InCharge Debt Solutions specializes in working with current and past U.S. military personnel. In particular, the agency focuses on helping service members handle financial challenges related to deployment, relocation and disability.

Cambridge Credit Counseling

Cambridge Credit Counseling is a nonprofit debt relief company that offers financial services such as debt consolidation, debt relief, student loan counseling and credit counseling. It also provides housing solutions to everyone from new homebuyers to those facing possible foreclosure.

The agency is accredited by the BBB and a member of the FCAA and the NFCC. It’s based in Massachusetts and has been operating for 25 years. Every credit counselor is fully licensed and has, on average, over a decade of experience.

What Happens After Signing Up for Credit Counseling?

After deciding to pursue credit counseling, you’ll need to call the agency of your choice and set up an appointment to speak with a counselor. You’ll want to bring information on all of your income, expenses and debts, as the counselor will not be able to provide an accurate analysis without it.

Next, the credit counselor will ask for your consent to perform a credit check. This will give the counselor a quick snapshot of where you stand regarding your overall credit health. If you’d like, you can request a free copy of your credit report from and bring it with you to the meeting instead. Every consumer is eligible for one free credit report every 12 months.

Once the counselor has all of the necessary information, he or she will create a personalized budget, a review of your credit and a detailed debt management plan. If you have any questions about the plan or the process, now is the time to ask them. You will then have the option of accepting the plan and continuing with the counselor’s help or taking the information home and attempting to work the plan on your own.

Here are 4 Other Debt Relief Options to Consider

Besides credit counseling, several other effective debt relief options are available . Here are a few:

1. Debt Consolidation Loan

Debt consolidation is a good option for those with multiple high-interest debts and cannot keep up with them or pay them off. This option lets you roll eligible loans into one single loan with a once-a-month payment schedule. Since debt consolidation loans usually come at a lower interest rate than individual debts, they can save the borrower money over time.

However, you’ll need to have good credit (670+ FICO score) to qualify for the best rates. Additionally, most lenders will only work with people whose debt-to-income ratio is no more than 40%.

Most debt consolidation loans range from a few thousand dollars to $50,000. Interest rates on these loans start at around 6.00%. Loans for borrowers with poor credit have an average interest rate of 12.00% to 18.00%.

If you need help managing several debts, have good credit, and can commit to paying off the new loan, debt consolidation could work for you. Only take out a loan for what you need, as this will give you the best chance of paying it off.

2. Credit Card Consolidation

Around 54% of all American adults own at least one credit card. Meanwhile, the average person owes around $6,000 in credit card debt — though it’s possible to rack up more than $20,000 in credit card debt .

Interest rates on credit cards vary widely but can easily reach double digits. If you have high-interest credit card debt, consider consolidating it. Doing this can help lower your interest rates and monthly payments, which could end up saving you hundreds or even thousands of dollars. Depending on the repayment plan, you could pay off your cards much faster than you would otherwise.

There are several ways to consolidate credit card debt . For instance, you could take out a low-interest personal loan or a debt consolidation loan. Or you could sign up for a Debt Management Plan from a certified credit counseling agency. Alternatively, you could apply for a 0% interest balance transfer credit card.

If you take out a loan or get a new credit card, make sure you’re prepared to make the payments on time to avoid penalties, like late fees or additional costs. Also, even if the interest is low, you might not be saving money in the long run if the repayment term is high. Do your due diligence and make sure you choose the best offer before signing up for anything.

3. Debt Settlement

Debt settlement is another type of debt relief that can lower your debts. Typically, debt settlement is done through a company that negotiates with your creditors on your behalf. These companies will charge a fee for their services, usually 15% to 25% of the amount of debt you enroll in the program. After debt settlement is complete, which usually takes two to four years, the average person sees a total debt reduction of 30% to 50% of their enrolled debts.

With debt settlement, you’ll need to set up a payment plan. Essentially, you’ll need to set aside money each month until you have enough to pay off your creditors. Using that money, the agency will then pay your creditors for you. Depending on the agreement, you’ll either pay the full amount in a lump sum or over a few months in installments.

This option is best for people with large amounts of unmanageable debt, accounts in collections or on the verge of bankruptcy. The process is complex and isn’t guaranteed since creditors don’t have to agree to settle your debts for less than what you originally owed. Even so, many creditors are willing to negotiate, especially if the alternative is that they don’t get paid at all.

Read more: Here are the 7 Best Debt Settlement Companies to Work With

4. Filing Bankruptcy

All individual bankruptcy filers must complete pre-bankruptcy counseling and pre-discharge debtor education. Credit counseling must occur before you file for bankruptcy; debtor education must occur after you file.

READ MORE: Types of bankruptcy explained

The Bottom Line

Ultimately, credit counseling is a legitimate way to get out of debt and improve your financial situation. For many people, it means major relief from the stress of being unable to pay their debts.

If you need someone to help keep you accountable and support you as you work to get ahead of your finances, don’t be afraid to reach out to an agency. Nonprofit credit counseling companies offer a free initial consultation, so there’s no risk or pressure to sign up for something that isn’t right for you. Just make sure you check for any red flags and review any documents before signing anything.

And if credit counseling doesn’t work for you, there are several other debt-relief options, such as debt settlement, debt consolidation and bankruptcy as a last resort.


Is Credit Counseling the Same as Credit Repair?

Both credit counseling and credit repair can help you reduce your debts, but they go about it differently.
With credit counseling, you work with an experienced, licensed credit counselor who can help you get ahead of your debts. Meanwhile, the main purpose of credit repair is to build up your credit, especially after it’s been affected by things like debt or delinquencies. While credit counseling can help you improve your credit, credit repair companies focus solely on this aspect of your financial health.
A credit repair company will not help with debt consolidation or provide a debt management plan. Instead, they look for errors in your credit report and help you remove them. Depending on the company, they’ll also write to the credit bureau on your behalf to correct the errors.

How Do You Develop a Budget?

There are two main ways to create a budget. You can do it yourself or use a budgeting app or service.
The first step in developing a personal budget is calculating your total net income (take-home pay after all deductions). Make sure you consider all income sources, including passive income, alimony, side gigs, etc. Once you’ve done that, calculate all of your fixed and variable expenses — that is, any bills, debts, and other monthly spending categories.
The next step is to write down some short-term and long-term financial goals. Examples of short-term goals include saving $500 or paying off a credit card. A long-term goal, meanwhile, could be to save up for a down payment on a house or set aside money for a child’s education.
Finally, look for any areas where you can reduce spending. Each month, put any extra money you have towards paying down your debts. Every so often, go back over your budget and make changes based on your current financial situation.

What’s the Difference Between a Credit Counselor and a Debt Settlement or Debt Relief Company?

Unlike most credit counseling agencies, debt settlement and debt relief companies are usually for-profit. This means they charge a fee for their services, though you won’t have to pay until the service is complete.
Debt settlement companies work directly with debt collectors and creditors to try to settle your debts at a reduced amount. However, since creditors aren’t obligated to agree, debt settlement doesn’t always work.
In most cases, the debt settlement company will encourage you to stop making payments on your enrolled debts until negotiations are finished. This will negatively impact your credit score, though you’ll be able to rebuild it at the end of the program.

Will Credit Counseling Help Me With Payday Loans?

Credit counselors don’t usually work directly with payday lenders. However, they can give financial advice to help you repay your loans or offer a debt management plan. They might also suggest a debt consolidation program for you. These options can make it easier to pay off your payday loans.

Will Credit Counseling Improve My Credit Score?

This depends on the service or program. Initially, the credit counselor might perform a hard pull on your credit report, which will cause a temporary dip. A debt management plan or debt settlement program could also cause your score to drop. However, other options like debt consolidation could actually help your credit score. And, as your financial situation improves, you’ll be able to start rebuilding credit as a byproduct of credit counseling.

Scroll to Top