Credit counseling is the process of advising and educating you about how to manage your money and deal with debts. The ultimate goal of credit counseling is to help you mitigate financial difficulties through careful budgeting, enrollment in debt assistance programs, and the long-term adoption of responsible financial habits.
There are different types of credit counseling companies and professionals, including nonprofits that provide services either for free or at a low cost. There are also various types of counseling services – from budget analysis to court-mandated bankruptcy counseling. A credit counselor will be able to analyze your finances and steer you toward the proper improvement plan. Read on to learn more about how credit counseling works and the different types of counseling you may need.
How Does Credit Counseling Work?
Credit counseling programs typically begin with an initial consultation where you discuss your finances, the options that are available to you, and the terms of your agreement. This is often referred to as entrance counseling, and in almost all cases, it will be free of charge.
How you proceed from your initial consultation will depend on the nature of your financial difficulties and therefore the type of credit counseling service you need. Below are some key things to keep in mind throughout the process.
- In most cases, the credit counselor will do a thorough review of your finances, so remember to bring copies of all your bills.
- Credit counselors will propose a solution based on their experience and understanding of not only what is necessary in a particular situation, but also what is actually viable.
- Most credit counseling services are offered free of charge, particularly non-intensive “core services” like budget analysis, credit report awareness, and overall financial literacy seminars. If you enter into a debt management program, bankruptcy counseling, or, in some cases, reverse mortgage counseling, you may be required to pay recurring (e.g. monthly) service fees.
- Consumers who go through bankruptcy are required to complete pre-filing and discharge credit counseling programs through a U.S. Trustee Program-approved organization. There is no formal requirement with most other types of credit counseling, however.
You can learn more about the different types of credit counseling services below.
Types of Credit Counseling
In addition to their know-how, a good credit counseling agency will bring a network of industry contacts to the table, enabling them to get your bills back on track as efficiently as possible. The following are among the most common things a credit counselor should be able to help you with.
Money Management
A trip to the credit counselor doesn’t necessarily have to be the result of serious financial difficulties, such as defaulting on debt or declaring bankruptcy. The process can actually be rather informal, with counselors helping their clients make sense of their finances and improve their money management efficiency through helpful budgeting and saving strategies.
Such simple guidance can have a significant positive impact, considering that only 2 in 5 people have a budget and keep close track of their spending habits, according to the National Foundation for Credit Counseling. What’s more, the average household owes roughly $11,000 to credit card companies, according to WalletHub data, and widespread consumer overleveraging actually helped the Great Recession become as bad as it was.
Credit Improvement
Despite how inherently important credit reports and scores are to modern money management – dictating the loans and credit card rates we get, the insurance premiums we pay, and even the jobs we’re eligible for – far too few people understand them. A good credit counselor will not only clarify the relationship between credit reports, scores, and everyday personal finance, but they will also help you parse your reports for errors and devise a personalized credit improvement strategy, if necessary.
Debt Management
Debt management is the most common course of action recommended by credit counselors, as the vast majority of people who seek counseling are having trouble making monthly payments on a number of different unsecured balances held with different lenders. Credit counselors are uniquely positioned to negotiate on behalf of their clients in such instances, given their knowledge of the debt management process and deep network of industry contacts.
Student Loan Counseling
Outstanding student loan debt is now in excess of $1 trillion and rising. Considering the prodigious cost of higher education as well as the hyper-competitiveness of the job market, this issue stands to become more and more significant over time. The right credit counselor will be able to explain your rights and obligations as a student borrower as well as apprise you of your eligibility for various repayment assistance and debt forgiveness programs.
Property Foreclosure Prevention
No one wants short-term financial difficulties to rob them of their home. A credit counselor may be able to help you avoid such an unfortunate event by analyzing your financial situation and helping to craft a strategy that can prevent your home from being foreclosed on. This includes exploring what options your mortgage company may offer you, such as a modified repayment plan or forbearance.
Reverse Mortgage Counseling
A person’s home is likely to be their most valuable asset. As a result, it sometimes makes sense to take out a reverse mortgage loan to tap into the equity you’ve accrued in your property and access funds for living expenses, medical bills, and home repair projects. The most common type of reverse mortgage is a home equity conversion mortgage, which is only available to homeowners who are at least 62 years old.
Reverse mortgages come with their fair share of complexity and risk. That’s why counseling with a HUD-approved counseling agency is required before taking one out. A credit counselor can help you determine whether a reverse mortgage is a wise move, as well as identify the best way to get one and problem-solve if you run into difficulties along the way.
Bankruptcy Counseling
While some people view bankruptcy as a quick, if painful, solution to their financial problems, it is neither straightforward nor a panacea. There are various types of bankruptcy filings, and a credit counselor can help you figure out which one is right for you, if any, as well as guide you through the process. That includes helping you complete court-mandated entrance and exit counseling.
The plan that you, your credit counselor and all of your lenders ultimately agree to will specify all parties’ rights and obligations (including when payments are due) as well as the promised results and the repercussions of missed payments or other material breaches. It is your job to verify, with the aid of a credit counselor, that you are doing the best thing for your wallet. Then just abide by that agreement and make sure everyone else holds up their end of the bargain as well, especially in terms of how your accounts in question are classified on your major credit reports.
Does Credit Counseling Hurt Your Credit?
Simply meeting with a credit counselor will have absolutely no bearing on your credit score. However, your credit score can drop temporarily if you enter into a program that alters lenders’ terms (i.e., lowers the monthly payment or forgives debt). That is the case with debt management, debt settlement, bankruptcy, or pretty much any other debt solution that you can think of, short of scrimping, saving, and paying in full.
In the long run, these programs are designed to improve your credit and get you out of your current bad financial situation. The point is that debt problems breed credit score damage, which means your job at this point in time is mitigation. You want to find the path of least resistance to debt freedom, and it can’t hurt to seek the expert opinion of a trained credit counselor offering a free consultation.
In other words, don’t let the threat of temporary credit score damage derail you from exploring a course of action that might be beneficial in the long run, perhaps even preventing more significant credit score ramifications. Plus, these items won’t be listed on your credit report forever. To learn more, check out WalletHub’s guides about how different types of negative information are noted on your credit reports as well as how long such records will remain noted on them.
For-Profit vs. Nonprofit Credit Counseling Services
A credit counseling company can be either a great asset or a great liability. It largely depends on the type of company that you decide to do business with. Credit counseling services are offered by two basic types of companies: those with a for-profit business model and organizations with nonprofit status. The table below gives more insight into the differences between these two types of companies.
| Category | Nonprofit | For-Profit |
| Cost | Generally free or at a low cost compared to for-profit companies | High monthly fees and/or a percentage of your debt |
| Reputation | Many companies are accredited by the National Foundation for Credit Counseling (NFCC) to ensure they meet high standards | Typically not accredited |
| Company status | 501(c)(3) | None |
| Main Mission | Educate consumers on how to manage their finances | Generate revenue |
Nonprofit credit counselors tend to be the least expensive and most trustworthy, but that is more a rule of thumb than gospel. Credit counselors vary widely in terms of reputation and effectiveness, even within the nonprofit and for-profit categories. It is therefore extremely important that you do a bit of research into a given organization before entrusting one of its credit counselors with your finances.
There are undoubtedly a number of admirable for-profit credit counseling companies. But with so many great nonprofits operating in the space, you have to wonder: why pay for something you can get for free? We therefore recommend that you look for a credit counseling organization with “501(c)(3)” status, which denotes it as a verified nonprofit.
Below, you can find a brief overview of a few of the most popular credit counseling companies, or types of credit counseling companies, in the nonprofit segment of the industry.
National Foundation for Credit Counseling
Founded in 1951 and boasting more than 1,500 certified credit counselors throughout the United States, the NFCC is both the largest and oldest nonprofit credit counseling organization in the United States. An NFCC stamp of approval is a distinct signal of quality in the credit counseling space.
Financial Counseling Association of America
The FCAA is a national credit counseling network and accreditation body. It establishes guidelines and standards of conduct for its member organizations, in addition to engaging in a variety of advocacy efforts.
Christian Credit Counseling
“Christian credit counseling” is neither the name of a particular company, nor indicative of any sort of religious requirement for consumer participation. Rather, the term describes a segment of credit counseling companies that base their services on Christian values.
“‘Christian’ Credit Counseling simply means that we approach the issue from a Christian/Biblical value perspective,” Larry Rosebure, operations manager for the nonprofit Christian Credit Counseling Service, told WalletHub. “We have had many clients over the years who have been attracted by our higher commitment to long-term behavioral change and relationship-based counseling. As long as the client is comfortable with and tolerant of our value base, we are happy to serve their needs in any way we can.”
Colleges & Universities
Not only do institutions of higher learning provide student loan counseling to enrollees, but many also offer free financial literacy programs and money management clinics to members of the community.
What to Look for in a Credit Counseling Service
Positive Reviews
Consider Better Business Bureau ratings and WalletHub reviews when researching credit counselors.
Nonprofit Status
The various nonprofit organizations that operate in the credit counseling space typically are the most trustworthy options available to consumers. You can find a nonprofit credit counselor in your area by visiting the National Foundation for Credit Counseling’s website.
Industry Connections
If debt management is a likely course of action, it’s good to have a credit counselor who is part of a large agency. The bigger the agency, the more industry ties it is likely to have.
Clear Fee Structure
Knowing exactly how much you’ll have to pay is essential to planning, and reputable companies don’t try to trick their customers.
Realistic Expectations
The ideal credit counselor is a pragmatist who can clearly explain your viable options rather than selling you a bill of goods.
Free Initial Consultation
You’ll want to make sure that you’re comfortable with whoever is counseling you, so the ability to schedule an in-person introductory meeting is essential.
What to Avoid With Credit Counseling Services
Anything Too Good to Be True
Predatory companies know what indebted consumers want to hear, and they’ll use that to take advantage of them. Building a thorough understanding of how the credit counseling and debt management processes work will reduce your odds of getting taken advantage of.
Upfront Costs
Reputable credit counseling companies do not charge for services yet to be performed.
Online or Phone Consultations
You should use a credit counselor who is easy to meet in person if necessary. If a particular credit counselor is too busy to meet in person, that indicates they don’t have the time to give your case the attention it deserves.
Conflicts of Interest
If your credit counselor refers you to third-party service providers, it is fair to ask if the counseling agency has any financial ties to the recommended organizations. You want unbiased advice based on what is best for your finances, not what will make the counselor the most money.
Overburdened Counselors
Every credit counseling case is unique, so you don’t want to do business with someone who employs a factory-line approach in order to meet the demands of a high caseload.
Credit Repair Companies
The for-profit credit 'repair' or 'relief' companies that advertise on TV, the radio, and social media are the exact type of companies you want to avoid.
Questions to Ask a Credit Counselor
Asking the right questions is essential when hiring any service provider. Doing so enables you to cut through the marketing fluff, address the nuts and bolts of your business relationship, and avoid potentially costly surprises. So, here is what you should be curious about:
- Does your organization have 501(c)(3) status?
- Is your organization accredited? If so, by whom?
- How is the organization funded? Does it have financial ties to any for-profit companies?
- Are you and your colleagues trained and certified as credit counselors?
- How long will the credit counseling process take?
- Are services provided in person, online, or over the phone?
- Will you provide the terms of our agreement in writing?
- How will my credit standing and tax obligations be affected?
- How much will it cost to use your services?
Credit Counseling Regulations
In addition to various state and local laws, there are a number of federal regulations in place to make the credit counseling market more transparent and to curb various unfair practices in the industry. Many were implemented in response to the economic hardships of the Great Recession, the complexity of the personal finance industry, and the numerous rule changes that consumers have been forced to internalize in recent years.
- Credit Repair Organizations Act: This section of the Consumer Credit Protection Act is meant to prevent credit “improvement” or “repair” companies from flat-out lying to consumers and charging for services never performed. Unfortunately, far too many predatory companies operate in the financial improvement space, looking to take advantage of desperate consumers. That is one important reason to work with a well-reviewed nonprofit credit counseling service.
- Fair Debt Collection Practices Act: This law prevents debt collectors from harassing or lying to consumers. You can read more about your rights when dealing with debt collectors in WalletHub’s Credit Card Bill of Rights.
Reverse Mortgage Stabilization Act: This amendment to the National Housing Act gave the Department of Housing and Urban Development the authority to make the reverse mortgage market safer, following widespread improprieties. A credit counselor can help you find a safe reverse mortgage and explore assistance plans if necessary.
Credit Counseling Alternatives
There is ultimately little reason to seek true alternatives to credit counseling. Most credit counseling services – including initial consultations – are free, so there is no harm in at least hearing what a trained expert has to say.
That is not to say, however, that you should take any credit counselor’s word for granted. Given that you are your own biggest advocate, supplementing your credit counseling efforts with additional research is a great way to take your financial future into your own hands. The following are some great ways to do so.
- Independent Research: Independent research is a great way to at least supplement credit counseling efforts. Being your own advocate is the most reliable way to ensure that you properly diagnose and treat your financial maladies, as well as avoid being taken advantage of. Most of us could stand to brush up on our financial literacy anyway.
- Informal Credit Counseling: Bouncing some ideas off a friend or relative who is knowledgeable about personal finance also can be quite helpful, if for nothing else but moral support. You obviously shouldn’t take anything they say for granted, unless they are licensed to provide financial advice, but you can ask questions, discuss strategy, and benefit from the perspective of someone who you know is in your corner.
- Free Bankruptcy Consultation: Depending on the nature of your financial situation, a credit counselor may inevitably suggest exploring bankruptcy. If you have a feeling that might be the case, scheduling a free initial consultation with a bankruptcy attorney is a great way to get the information and guidance you require. Even if you meet with a credit counselor as well, a bankruptcy consultation is still a good idea in the sense of getting a second opinion from a very knowledgeable source. For more information about the bankruptcy process, check out WalletHub’s bankruptcy guide.
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