What is Credit Counseling

Credit counseling provides consumers with guidance on consumer credit, money management, debt management and budgeting. The goal of most credit counseling is to help a debtor avoid bankruptcy. Many counseling services will negotiate with creditors on the borrower's behalf to reduce interest rates and late fees.

Breaking Down Credit Counseling

Reputable credit counseling organizations employ trained and certified staff. These counselors can talk with clients to help them develop a personalized plan for their credit issues. An initial counseling session typically lasts one hour, with an offer of follow-up sessions. A reputable agency should offer information about its services free of charge without requiring potential clients to disclose details about their situation.

Credit Counseling Services

There are many not for profit credit counseling groups that offer services in person, online and via telephone. Many universities, military bases, credit unions, housing authorities and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Local financial institutions and consumer protection agencies may also be good sources of information. However, non-profit status does not guarantee that services are free, affordable or legitimate. Some credit counseling organizations charge high fees, which they made hide. Others may urge clients to make contributions to their charitable organization. 

Help Finding a Credit Counselor

The National Foundation for Credit Counseling is a nonprofit that connects consumers with nonprofit credit counsellors. Also, consumers can check with their state attorney general and local consumer protection agency to see if consumers have filed complaints about a credit counseling agency. The United States Trustee Program keeps a list of credit counseling agencies approved to provide pre-bankruptcy counseling. Bankruptcy law mandates that anyone filing for bankruptcy must first undergo credit counseling.

If a consumer's financial problems are the result of too much debt, a credit counseling agency might recommend enrollment in a debt management plan (DMP). A certified credit counselor will review a consumer's financial situation and offer customized money management advice. This advice may include a DMP designed for the client's unique circumstances. 

Under a DMP plan, the consumer deposits money each month into an account within the credit counseling organization. The organization uses the funds to pay unsecured debt, such as credit card bills, student loans and medical bills. These debt payments follow a schedule the counselor and consumer develop together. Often, creditors will need to agree to the scheduled repayment plan. Creditors may decide to lower interest rates or waive fees. A successful DMP requires regular, timely payments. It may take 48 months or more to complete a debt management plan.