Credit counseling is a service that helps borrowers manage their finances.

Most credit counseling organizations are non-profits. In addition to providing advice and guidance, they can also negotiate with creditors to reduce interest rates, adjust payment schedules, and eliminate fees.

Credit counselors often create a debt management plan (DPM) for enrolled borrowers. [1]. In exchange for a series of regular payments to an account, the credit counselor will pay off enrolled debt. Debt Management Plans usually last around 48 months [2].

Credit Counseling vs. Debt Settlement

Credit counseling differs significantly from debt settlement. While credit counselors can negotiate the terms of a loan, like interest rates and repayment schedules, they cannot press to forgive any outstanding balance.

Furthermore, most credit counselors are run by non-profits and government agencies, while debt settlers are typically for-profit companies.

While credit counseling offers a lower return compared to debt settlement, it does not damage credit scores like the debt settlement process.

Finding a Credit Counselor

A variety of organizations operated by governments and non-profits offer credit counseling programs. Most programs offer free services, though some programs, particularly Debt Management Plans (DMPs) often require small monthly fees.

The National Foundation for Credit Counseling is a national network that can connect borrowers to counseling organizations. Organizations part of the association are required to undergo an accreditation process to ensure reliability.

All individuals seeking to file for bankruptcy are required to first undergo credit counseling. The U.S. Justice Department maintains a list of organizations approved for bankruptcy-related credit counseling.

Pros & Cons

Pros

Low Cost - Most credit counseling offers services for little (under $100 monthly) or no cost.
No damage to credit score - Unlike debt settlement, the credit counseling process does not harm credit scores.
Results - Debt management plans are generally effective for those who complete them, with a 16% reduction in debt after six quarters of counseling compared to control outcomes with no counseling. [3]

Cons

Low success rate - Approximately 21% of Debt Management Program participants successfully complete a Debt Management Program, according to a study reviewed by the FTC [4]. This compares to a 45-50% completion rate found for debt settlement programs [5].
Lower rate of return - Credit counseling reduces debt by a lower amount than debt settlement.