How Credit Counseling Works

If you're struggling to manage your debt and achieve financial stability, credit counseling services can be helpful on your journey to a debt-free future.
  

It's important to understand how credit counseling works, the differences between debt settlement and credit counseling, and the compelling reasons to partner with a credit counseling service. Then, you can take control of your finances and unlock a brighter financial future for yourself and your loved ones.

WHAT IS CREDIT COUNSELING?

Credit counseling is a service provided by organizations to help individuals and households manage their debt and improve their financial situation. It involves working with trained credit counselors who offer guidance, education, and support to people facing financial challenges.

HOW DOES CREDIT COUNSELING WORK?

The primary goal of credit counseling is to assist individuals in gaining control over their finances and achieving financial stability. Specifically, a credit counselor will assess your financial situation, including income, expenses, and debt obligations. Then, they'll develop a personalized budget and provide advice on how to effectively manage your money.

In addition to budgeting, credit counselors can also provide assistance with debt-related issues. For example, they can negotiate with creditors on your behalf to establish a manageable repayment plan, reduce interest rates, or waive fees. Plus, they can provide advice on debt management options and guide individuals through the process.

DEBT SETTLEMENT VS. CREDIT COUNSELING

Debt settlement and credit counseling are two distinct services with different implications for individuals in debt. Here's a comparison between the two.

Approach

Debt Settlement—involves negotiating with creditors to reach an agreement to settle debts for less than the total amount owed. The goal is to reduce the overall debt burden by making a lump-sum payment.

Credit Counseling—focuses on providing education, guidance, and support to individuals in managing their debt. The emphasis is on creating a budget, developing a repayment plan, and improving overall financial management skills.

Impact on Credit Score

Debt Settlement—can hurt credit scores because many debt settlement companies advise customers to halt their monthly debt payments. Doing so can result in negative marks on your credit score and result in your unpaid debts being turned over to collection agencies.

Credit Counseling—does not directly affect credit scores. However, enrolling in a debt management plan (DMP) through credit counseling may be noted on your credit report. This notation alone usually does not significantly impact credit scores, but it may affect your ability to obtain new credit while the debt management plan is in place.

Debt Reduction

Debt Settlement—aims to reduce the total debt owed by negotiating with creditors for a lower settlement amount. However, you can usually negotiate the same reductions by contacting your debtors directly.

Credit Counseling—creates a structured plan to repay the debt. While credit counselors can negotiate reduced interest rates and fees, the aim is to repay the debts in full over time.

Financial Education

Debt Settlement—primarily focuses on negotiating with creditors and reducing debt amounts instead of providing thorough financial education or long-term financial management guidance.

Credit Counseling—emphasizes financial education and provides tools and resources to help you understand and improve your financial well-being in the long term.

Fees

Debt Settlement—FTC regulations require debt settlement companies to perform three services before collecting fees. First, the company must finalize a deal with the customer's debtors that provides relief to the customer. Second, the customer must agree with the settlement. Third, the customer must make at least one payment under the terms of the settlement. So, if you encounter a debt settlement company that requires payment up front, it's best to find another company.
  

Credit Counseling—agencies that offer credit counseling are typically non-profits that don’t charge for the bulk of their services. However, some charge fees for specific services.

THE BENEFITS OF CREDIT COUNSELING SERVICES

There are several advantages to working with a credit counseling service, including: 

• Expert guidance and support in creating a realistic budget, prioritizing expenses, and developing a debt repayment plan.
• Valuable financial education and resources, including tips on budgeting, saving, responsible credit card use, and other critical financial skills.
• Advice about debt consolidation, which simplifies the repayment process and can help you pay off debts more efficiently.
• Options for negotiating with creditors on your behalf to lower interest rates, reduce fees, or instate a manageable payment plan.
• Using alternative solutions to bankruptcy and its long-term consequences on your credit.

HOW TO FIND  CREDIT COUNSELING SERVICES

You can use multiple resources in your search for credit counseling. Visit the website of the National Foundation for Credit Counseling or call 800-388-2227. Visit the Financial Counseling Association of America or call 800-450-1794. You can also research agencies with your state's attorney general or consumer protection office.