Credit Counseling Explained: How It Works and When To Use It
Written by
Joseph Hostetler
Edited by
Emily Gadd
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Credit counseling provides education to help eliminate your debt with better money management. Credit counselors help craft a monthly budget, outline action steps that’ll improve your credit profile and propose a debt repayment plan. Credit counselors may also recommend more structured debt management solutions.
It’s offered by nonprofit agencies, private firms and government organizations. These are judgment-free zones. If you think you’re in a bleak situation, credit counselors have likely seen worse.
How Credit Counseling Works
How does credit counseling work? It’s a relatively straightforward process that your counselor will guide you through. Here’s what you can expect.
1. Initial Consultation
You’ll call a credit counseling agency and review your financial situation with a certified counselor.
2. Budget Assessment
Your credit counselor will craft a personalized financial plan and show you a light at the end of the tunnel. It may be difficult to swallow — but if there’s a way out, they’ll find it.
3. Initiate a Debt Management Plan
Depending on your situation, the credit counselor may recommend that you open a debt management plan if necessary.
This can lower your monthly payment by consolidating your unsecured debts into a single loan with a reduced interest rate.
4. Receive Financial Education
Beyond just one-time counseling, you can receive direction on managing your money and avoiding debt in the future.
Credit Counseling vs. Debt Settlement vs. Debt Consolidation
Nobody would fault you for confusing credit counseling with other similar, but distinct, credit services, namely, debt settlement and debt consolidation. Here’s a quick snapshot of each.
| Feature | Credit Counseling | Debt Consolidation | Debt Settlement |
|---|---|---|---|
| How It Works | Provides budgeting help and lower interest rates | Takes out a new loan to pay off existing debts | Settles debts for less than owed, often requiring a lump sum |
| Impact on Credit Score | Minimal impact, though may improve over time | May cause a temporary dip but improves long-term | Negative impact due to missed payments before settlement |
| Fees | Low or nonprofit-based fees | Interest rates and possible origination fees | High fees, often a percentage of settled debt |
| Best For | Those struggling with budgeting and high interest rates | People with multiple debts who want a structured repayment plan | Individuals deeply in debt unable to pay full amounts |
Credit Counseling
As you can see, credit counseling helps you create a budget, along with offering debt management plans to expedite your journey out of the red. However, it doesn’t eliminate debt. You’ll still owe what you owe.
Debt Consolidation
Debt consolidation combines multiple debts into a single loan, often with a lower interest rate. However, this usually requires a good credit score.
Your credit score may knock down a few points upon account opening, but it’ll bounce back quickly with good credit habits. It can even dramatically improve your credit by lowering your overall credit utilization.
Debt Settlement
Debt settlement, on the other hand, involves negotiating with creditors to reduce the total debt you owe. Your credit score can also take a hit with this strategy.
That’s because you’ll typically need to stop paying the minimum to pressure your lenders into negotiating. Your credit score will freefall — and take potentially many years to repair. You can try to settle debt yourself or pay a company to do it for you.
Who Should Apply for Credit Counseling?
There are several scenarios where credit counseling is a good, even vital, idea. Ask yourself the following questions:
- Do you struggle with high-interest debt?
- Do you need help creating a budget and managing expenses?
- Are you considering bankruptcy but looking for alternatives?
If you answered yes to these, you might be a good candidate.
Credit counseling can serve anyone who wishes to improve their credit and financial habits. Even if you’ve decided that bankruptcy is your only option, credit counseling is mandatory before you can formally file.
Types of Credit Counseling Services
Credit counselors can aid you no matter what financial predicament you’re going through. For example:
- Budgeting assistance. Receive help managing your expenses and avoiding overspending, which in turn, can lead to debt.
- Debt management plans: With a DMP, you can consolidate your debts across multiple accounts and receive lower interest rates. This can result in much lower monthly payments.
- Housing counseling: Counselors can help you plan for mortgages and even rent payments.
- Student loan counseling: Get insight on the best repayment options for your student debt.
- Bankruptcy counseling: Again, this is required before and after filing for bankruptcy.
How To Find a Reputable Credit Counseling Agency
As incredible as it may sound, not all services targeted toward those in financial distress are philanthropic. Some are downright predatory.
When you’re searching for the best credit counselor, look for nonprofit agencies accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America. You’ll also want to check for certifications and reviews — and nip over to the Better Business Bureau to check those standings, too.
A Golden Rule To Follow
Beware of agencies that charge high upfront fees or make unrealistic promises. If you’re dealing with a for-profit company, it may not have your best interest in mind.
Credit Counseling FAQs
Here are the answers to some of the most frequently asked questions about credit counseling.- Does credit counseling hurt your credit score?
- Initiating credit counseling doesn't hurt your credit score. It's only guidance on how you should handle your finances. That said, if you elect to participate in a debt management plan, your credit score will almost certainly be negatively affected due to things like missed payments and the closing of credit cards, which can result in a higher credit utilization ratio.
- How long does a credit counseling program take?
- A credit counseling session itself typically takes an hour or so. The long-term relationship only occurs if you decide to engage in a debt management plan which can last up to five years. This gives the agency the responsibility of dealing with your creditors and setting up a payment plan to help you pay off your debt faster.
- Can credit counseling help with student loans?
- Credit counseling can help with student loans. Whether federal or private loans, you can at least get advice on the best path to repayment from a counselor. In many cases, you may be able to benefit from debt forgiveness programs which the counselor can outline for you. It's worth mentioning that dedicated student loan counselors exist; you may have better luck chatting with them instead of a standard credit counselor.
- What are the fees for credit counseling?
- Because the primary goal of credit counselors is to improve your financial situation, your initial consultation is often free. Only when you choose a debt management plan will you run into fees, which can include an initiation fee, monthly interest fees, etc.
- Is credit counseling better than debt settlement?
- Credit counseling is better than debt settlement. Not only can you get advice from a trained counselor about how you should handle your money, but you can enter into a debt management plan that consolidates your debts and gives you a more manageable payment plan. Debt settlement is devastating to your credit score, as it usually requires you to default on your loans to get your creditors to accept less money than you owe.
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- American Consumer Credit Counseling. "Consumer Credit Counseling : What Is It and How Does It Work?"
- CBS News. 2025. "Credit counseling vs. debt relief: Which is better for borrowers?"
- U.S. Trustee Program. "Frequently Asked Questions (FAQs) – Credit Counseling."
