What Is Credit Counseling
Written by: Jacob S.
Published on:
When debt starts to feel overwhelming and managing monthly bills becomes a struggle, many individuals turn to credit counseling as a strategic first step toward regaining control of their finances. But what exactly is credit counseling, how does it work, and who should consider it?
What Is Credit Counseling?
Credit counseling is a professional service designed to help individuals manage debt, understand their finances, and make informed money decisions. It typically involves working with a certified credit counselor who evaluates your financial situation and helps you develop a personalized plan for improving it.
Credit counseling can provide the structure and support you need if you're facing mounting credit card balances, reduced income, or just a lack of financial knowledge.
Key Objectives of Credit Counseling
Credit counseling isn’t a one-size-fits-all service. It’s tailored to the unique challenges of each person’s financial picture. Still, the most common goals include:
1. Financial Education
Many counseling programs offer free or low-cost workshops and courses that teach budgeting, saving, and debt management. The goal is to assist individuals with financial literacy to avoid repeating financial mistakes.
2. Debt and Money Management
Counselors assess your income, expenses, and debts to help you handle your finances more efficiently. This includes strategies for handling existing debts and managing future obligations.
3. Budget Development
Since nearly two-thirds of Americans don’t follow a budget, counselors help individuals build a realistic one—highlighting essential expenses, debt payments, and savings goals.
4. Customized Financial Plans
Over 60% of people who seek credit counseling do so because of a drop in income. Counselors help these individuals develop structured plans that reduce debt burdens without compromising basic living needs.
How the Credit Counseling Process Works
While exact procedures vary by organization, here’s what a typical credit counseling process might look like:
Step 1: Initial Consultation
Whether online, by phone, or in person, the first session is all about discovery. The counselor asks about your income, debts, and spending habits to assess your financial condition.
Step 2: Budget Creation
Using your financial data, the counselor crafts a budget that balances your income with current obligations. This budget becomes the roadmap for future financial decisions.
Step 3: Debt Management Plan (DMP)
If needed, the counselor may develop a Debt Management Plan. This outlines a structured repayment schedule and may include negotiated interest rates or waived fees with creditors.
Related: Applying for a loan while on a DMP
Step 4: Education and Resources
Counselors may recommend (or require) attendance at financial education sessions. These workshops help you understand how to sustain long-term financial health.
Step 5: Ongoing Guidance
Beyond the initial sessions, counselors offer practical money management tips and may continue monitoring your progress.
When Should You Consider Credit Counseling?
You don’t need to be on the verge of bankruptcy to benefit from credit counseling. Here are common situations where credit counseling can make a difference:
- Job loss or reduced income
Income disruptions can make it difficult to keep up with bills and debt. - Medical debt or sudden expenses
Unplanned expenses can quickly overwhelm even a stable budget. - Struggling with poor credit
A low credit score limits financial options and raises borrowing costs, but credit counseling can help you regain control.
If you're nodding along to any of these scenarios, it might be time to speak with a counselor.
Who Provides Credit Counseling?
Credit counselors are certified professionals, typically affiliated with nationally recognized organizations. Reputable providers include:
- National Foundation for Credit Counseling (NFCC)
- Financial Counseling Association of America (FCAA)
- National Association of Certified Credit Counselors (NACCC)
Before choosing a counselor, consider these tips:
- Check credentials – Ensure the counselor has proper certification and experience.
- Review services offered – Look for services that match your needs (debt, housing, student loans, etc.).
- Understand the fees – Always ask for a full disclosure of costs.
- Watch for conflicts of interest – Ask if the counselor receives compensation from third parties.
Will Credit Counseling Affect My Credit Score?
Good news: Credit counseling itself doesn’t directly impact your credit score. However, enrolling in a Debt Management Plan may show up on your credit report and could affect future borrowing, depending on how lenders interpret it.
That said, by sticking to the counselor’s recommendations, you’re more likely to reduce your debt, make consistent payments, and ultimately improve your credit over time.
Credit Counseling vs. Credit Repair
It’s important not to confuse credit counseling with credit repair—they are very different services:
|
Feature |
Credit Counseling |
Credit Repair |
|
Purpose |
Education and debt management |
Score improvement through report changes |
|
Provider |
Certified professionals |
For-profit companies |
|
Approach |
Budgeting, planning, education |
Disputing and removing items |
|
Cost |
Often free or low-cost |
Typically more expensive |
|
Legitimacy |
Regulated and monitored |
Often criticized for questionable tactics |
Eye-Opening Credit Counseling Statistics
Let’s look at what the data reveals, based on findings from the National Foundation for Credit Counseling (NFCC):
-
Average monthly income of counseling clients: $3,400
-
Average monthly debt payments: $1,350
-
Average savings: $1,200
-
75% of individuals seeking counseling reported no monthly savings
-
41% only made minimum payments on credit cards
-
50% received more than one collection call
These figures reflect the financial strain many Americans experience—and the critical role credit counseling can play in reversing the trend.
Credit counseling can be the stepping stone toward a healthier financial future. Whether you're barely making ends meet or just want to take control of your finances, a certified counselor can provide the structure, education, and support you need.
Remember: It’s not just about paying off debt. It’s moreso about learning how to stay out of debt and build a stronger financial foundation.
