What Is Credit Counseling?

What Is Credit Counseling?

Credit counseling is a service aimed at helping individuals who are overwhelmed by debt. Many credit counseling agencies are nonprofit organizations. 

Nonprofit credit counselors provide a free initial consultation that is 45 to 60 minutes. During this session, the counselor will review your income, debts, expenses, and credit report and come up with personalized debt relief recommendations.

Depending on your financial situation, they may recommend a debt management plan, debt consolidation, or bankruptcy. Credit counseling agencies also offer more general money management assistance, such as financial education materials and budgeting help.

How Do You Find a Credit Counselor To Work With?

To find a reputable credit counselor, start by looking for a nonprofit credit counseling agency that is certified by the National Foundation for Credit Counseling (NFCC). The NFCC has an online agency finder tool that makes it easier to locate a credit counselor who can help you. 

Your options for completing credit counseling will depend on the agency you choose to work with. You may be able to complete your credit counseling session over the phone, online, or in person.

What Happens at the Free Credit Counseling Consultation?

During your free session, your credit counselor will ask about your income, debts, and living expenses. Once they have a big picture of your income and expenses, they’ll ask about your goals and challenges. 

This piece is very personalized. Some people are struggling with debt because they have more monthly expenses than income. Others may have fallen behind because of a setback, like job loss, an illness or medical emergency, or a divorce. Understanding the root of the problem will help your credit counselor find solutions for you. 

It can be hard to talk about your financial problems, but it’s important to be honest. Your credit counselor can’t help you unless they have complete and accurate information. Keep in mind, they aren’t there to judge you. They’re there to help you meet your financial goals, improve your credit score, develop a budget, and make a debt repayment plan.

What Information Will the Credit Counselor Ask You For?

Most credit counselors will ask you to provide information about the following:

• Income: Gather paycheck stubs and information about any other income sources you may have, such as child support or retirement income.

• Expenses: Gather bills or statements showing all your regular household expenses, such as rent, utilities, and transportation.

• Debt: Gather copies of your credit card bills, loan schedules, collection notices, and any other documents showing balances and due dates; it’s also important to know the status of your debts and provide information about past-due balances, lawsuits, or wage garnishments you’re facing.

To make the most of your credit counseling session, you should organize this information in advance. Make a list of household expenses, and double-check to make sure you aren’t forgetting anything. Make a note if you have any debts you don’t have statements for to make sure you don’t leave anything out when you talk to your credit counselor.

Are Credit Counseling Services Only for People Filing Bankruptcy?

No. Anyone who qualifies can have a free consultation with a certified credit counselor. Meeting with a credit counselor can help you understand your debt relief options, including but not limited to bankruptcy. 

If you decide that bankruptcy is the right choice for you, you’ll need to take a bankruptcy counseling course before you file your case. You can learn more about this required course in Upsolve’s article on bankruptcy credit counseling.

What Debt Relief Solutions Will the Credit Counselor Tell Me About?

There are five common debt relief solutions that your credit counselor might cover, depending on your circumstances:

• Budgeting and establishing a debt repayment strategy: Developing a structured plan to manage spending and save money

• Debt Consolidation or Refinancing: Taking out a new loan with a lower interest rate or doing a credit card balance transfer to pay off existing debts

• Debt Management Plan: Consolidating your monthly debt payments into one manageable amount (usually with a lower interest rate)

• Debt Settlement: Negotiating to pay a lump sum that is less than the total debt you owe

• Bankruptcy: Discharging eligible debts, including credit card debt, medical bills, personal loans, and more

The credit counseling organization can help you with budgeting and setting up a debt management plan (DMP). If you decide to get a debt consolidation loan or file for bankruptcy, you may need to find additional help, but the credit counselor can point you in the right direction.

What Is Budgeting & Establishing a Debt Repayment Strategy?

Budgeting might sound like a basic first step, but many people overlook it because they have anxiety or fear about what they'll find when they closely examine their finances.

However, taking a close look at your income and expenses can be eye-opening and freeing. It helps you understand where your money goes each month, pinpoint necessary versus optional expenses, and determine how much you can realistically save or use to pay off debt.

Some people are surprised to see that their financial situation isn’t as bad as they thought. If this is the case for you, you can try some DIY debt repayment strategies before getting into more serious debt relief solutions.

One popular strategy is the debt snowball method. With this method, you start paying off your smallest debts first, gaining momentum as each balance is cleared. The money freed up from cleared debts can then be rolled into larger payments for bigger debts.

If you know your debt and financial needs go beyond basic budgeting, check out the other strategies below.

What Is Debt Consolidation and Refinancing?

Debt consolidation and refinancing can help you simplify your debt repayment and pay less over time with a lower interest rate.

• Debt consolidation involves taking out a new loan and using the funds to pay off existing debt — such as credit card bills, medical expenses, or loans. This makes it easier to manage your debts because you only have one payment to keep track of each month, often with a lower overall interest rate. If you mostly have high-interest credit card debt, you can also consolidate by doing a credit card balance transfer to a card with an introductory 0% interest rate.

• Refinancing involves replacing an existing debt with a new loan that has better terms, such as a lower interest rate or a different repayment schedule. It often works for secured debts like a home loan or car loan. These are called secured debts because they are backed or “secured” by the home or car, which serves as collateral.

Both strategies can help make your debt more manageable by lowering monthly payments, reducing the total amount of interest you pay, or shortening the amount of time it takes to pay off your debts.

What Is a Debt Management Plan?

A debt management plan is a structured payment plan that can help you manage high-interest credit card debts, medical bills, and personal loans. 

When you enroll in a debt management plan, a credit counseling agency works with your creditors to lower your interest rate and waive late fees or other fees. This can reduce your monthly payment and help you pay less over time. Plus, instead of paying multiple creditors at different times, you make one payment to the agency each month, which may also charge a small monthly fee.

What Is Debt Settlement?

Debt settlement is a process where you (or a debt settlement company) negotiate your debt with your creditors. The objective is to convince creditors to agree to a smaller, manageable amount that you can pay off immediately, which can help clear the debt faster.

Not every creditor will be willing to negotiate a settlement. This typically works better for people who have already missed several payments on a debt and who have the ability to repay about half the total debt they owe in one lump sum.

What Is Bankruptcy?

Chapter 7 bankruptcy is a legal process designed to help you clear most of your unsecured debts, such as credit card debt and medical bills, and get a fresh start. It often works best for people who feel like they’re drowning in debt and can’t see a way out. 

Once you file, debt collectors aren’t allowed to contact you thanks to the automatic stay, which can provide much-needed relief if you’ve been struggling for a while. Keep in mind that you have to meet certain eligibility requirements to file for Chapter 7 bankruptcy.

If you decide this is the best path for you, you can take our two-minute screener to see if you’re eligible to use our free filing tool. If you aren’t eligible for Chapter 7 or you want some legal advice about your situation, Upsolve can connect you with a bankruptcy attorney for a free consultation.

What’s the Best Debt Relief Solution for You?

The best debt relief solution is the one that works for you and aligns with your values and goals. A good consumer credit counselor can help you figure this out based on your specific situation. 

Your credit counselor will work with you to create an action plan. In other words, credit counseling isn't just about educating yourself. You will leave your session with clear next steps. Your credit counselor may also review your credit report, and can tell you how each of the possible solutions may affect your credit score.

Remember, nonprofit credit counseling agencies don’t charge for the initial session. So, you have nothing to lose by speaking with a counselor. The more you know, the better your chances of finding the right path to a debt-free life.

Should You Hire a Private Debt Relief Company?

When you’re looking for help managing money, it’s important to do your homework about the organization you choose to work with. The debt solutions industry has more than its share of bad actors. Some for-profit companies, such as debt settlement providers, may make promises they can’t keep. When you’re under pressure, it’s easy to be misled by promises of quick relief or drastically reduced debt. Unfortunately, that can be an expensive mistake. 

How To Find Out if a Debt Relief Agency Is Legit

Luckily, there are some quick and easy ways to see if the agency you’re considering hiring is legit. One quick way is by searching for the agency on the Better Business Bureau (BBB) website. The BBB provides a rating for every company as a letter grade, and it includes an explanation for that grade. You can also read customer complaints against the company and see how the company has responded to the complaints.

Several federal and state consumer protection agencies provide information about what to watch out for with debt relief companies. The Consumer Financial Protection Bureau (CFPB) has a wealth of free information and a searchable complaint database. The Federal Trade Commission (FTC) or your state attorney general can also provide information on organizations that have been sued or press releases about legal action taken against specific companies.

Finally, you can also look at customer reviews on sites like Google or Trustpilot. You don’t have to devote a ton of time to the vetting process. Even a 10–15-minute search could help you avoid a scam or save you stress and money from working with an ineffective company.