If you’re struggling to manage your debts, you’re not alone. The vast majority (95%) of Americans have credit cards, and most of those who do have some sort of credit card debt. 1 As of 2021, the average American owed a staggering $5,000 on their credit cards. 2
Thankfully, a qualified credit counselor can offer you personalized financial advice, explain your options to you, and help you get out of debt.
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What do credit counselors do?
Reputable credit counseling organizations are staffed with certified credit counselors who can help you manage your finances, repay your debts, and improve your financial literacy.
Here are some services that credit counselors offer:
- Personalized advice on how to manage your debts and finances
- Access to your credit reports and credit score
- Free educational materials
- Budgeting assistance
- Free money management workshops
- Debt management plans (DMPs)
The last point is particularly important, because a debt management plan can be a lifesaver if you’re struggling with credit card debt. We’ll explain exactly what a DMP is below.
How are credit counseling services offered?
You can receive credit counseling in person, online, or over the phone. You can expect to receive an initial hour-long counseling session (which should be free), and then your counselor will help you arrange follow-up sessions if necessary.
What is a debt management plan?
Credit counseling organizations provide debt management plans (DMPs) to help you get out of credit card debt.
Oftentimes, credit counselors will negotiate with your creditors on your behalf to get you better repayment terms. They may be able to obtain the following concessions for you:
- Lower monthly payments
- A longer repayment period
- Lower interest rates
- Fee waivers (meaning, e.g., you won’t have to pay your late fees if you’ve been late with payments)
Once you’re enrolled in a DMP, you’ll stop paying your creditors and instead make a single monthly payment to the credit counseling agency. Your credit counselor will then distribute the funds to your creditors.
Disadvantages of debt management plans
DMPs can be very helpful, but they do have a few drawbacks: 3
- They only apply to unsecured debt (debt with no collateral, such as your house or car)
- Many are even more specific and only apply to credit card debt
- They last a relatively long time (3–5 years)
- You won’t be able to use your credit accounts while enrolled
- They usually cost $50 upfront and around $25 per month
- Your credit report may show that you’re enrolled in a DMP, which will make it hard to get new credit or loans since your lender will see that if they check your credit
How to find a credit counselor
The best way to find a legitimate credit counseling agency near you is to search the online database of government-approved agencies.
If you choose a company that’s not on this list, bear in mind that even credit counseling organizations that call themselves nonprofit can be illegitimate or charge hefty fees. 5 Do your research to ensure that you don’t get scammed.
Choosing the right credit counseling agency
When picking an accredited agency, try to find one that’s a member of the National Foundation for Credit Counseling (NFCC), which is the largest and oldest nonprofit financial counseling organization in the US, with offices in all 50 states.
Steer clear of agencies that charge fees upfront—most offer a free initial counseling session and will only charge a fee if you enroll in a debt management plan. Companies that charge large fees upfront are likely to be scams.
It’s a serious red flag if your agency does any of the following: 5
- Fails to offer proof of certification, qualifications, or staff training
- Makes promises that seem too good to be true with no formal written agreement
- Charges for educational materials
- Asks you to make “voluntary” contributions
- Is intentionally vague about what fees they charge for debt management programs
- Gets a commission for enrolling you in a DMP
- Claims that a DMP is your only option without evaluating your financial situation
If you notice any of those red flags, don’t give the agency any of your personal information (including your contact info). Search for a different company.
Who should use credit counseling
Most people who use credit counseling are deep in debt—most often credit card debt. However, credit counseling can also be helpful if you’re not in debt yet but you’re financially struggling.
Credit counseling is a good way to learn about strategies that will help you manage your finances, and it can help you avoid going into debt in the first place. It’s also safe—credit counseling won’t hurt your credit score or leave a negative mark on your credit report.
Alternatives to credit counseling
Despite the benefits of credit counseling, it isn’t the best solution for everyone. Here are some alternatives you can try:
- Debt consolidation: If you have a relatively good credit score, you can take out a loan and use it to pay off your high-interest debt (such as credit card debt). Consolidating your debts onto one loan simplifies your payments and saves you money on interest.
- Voluntary repossession: If you’re having trouble repaying off debt from a secured loan, such as a mortgage or auto loan, then you could give up the asset that’s securing your loan to have the debt cleared. This obviously isn’t ideal since it involves giving up your property, but looks better to lenders than an involuntary repossession.
- Debt settlement: With a debt settlement, your creditor agrees to accept payment for less than the full amount you owe. This is still damaging to your credit, but it’s often better than leaving your debts unpaid.
- Bankruptcy: As a last resort, you can file for bankruptcy and get a fresh start. You have the choice between chapter 7 and chapter 13 bankruptcy, which differ in terms of what your creditors will get from you and how long the bankruptcy will stay on your credit report.
Whichever route you choose, make sure to consider all the pros and cons first and do enough research that you understand how it will impact your credit and your finances.