Debt Counseling: How to Find the Best Service for You

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Debt counseling services, also known as credit counseling, are usually offered by nonprofit credit counseling organizations with financial professionals who specialize in advising people in tricky financial situations that involve credit, debt and budgeting.

How do debt counseling services work?

Debt counseling is a service that trained debt or credit counselors offer to consumers who need help creating a budget, improving their credit and managing their debt. When offered by a nonprofit organization, these services may be free or low cost. An initial consultation might be free, whereas more hands-on services like a debt management program, discussed below, might cost $25 or $35 per month. You might find debt counseling useful if you:

  • Have trouble managing multiple payments or have missed payments on your debt.
  • Feel overwhelmed by your debt and are struggling to pay it off.
  • Find it difficult to come up with a budget that can help you pay off debt faster.
  • Want to understand and improve your credit to qualify for lower interest rates.
  • Can't afford your monthly payments.

What does a debt counselor do?

First and foremost, debt counselors educate and advise. Depending on your reasons for seeking debt counseling, your debt counselor may help you pull your credit report and review it in detail so you understand how your actions impact your credit. They will likely review your income and expenses, help you create a manageable budget and point out areas where you can cut costs to free up income that can then go toward paying off debt.

If your payments are still unmanageable relative to your income, debt counselors can also help you set up a debt management plan. Under a debt management plan, you'll make one consolidated monthly payment to your debt counseling organization, and they'll pay each of your lenders.

In certain circumstances, your debt counselor may negotiate down the balances you owe. More often, though, they will negotiate lower monthly payments with each lender so that you can afford them more easily. It's important to realize that this may involve extending your loan term, which would typically result in you paying more in interest over time.

Make sure you always work with a certified debt counselor, as these certifications are the only way to ensure your counselor is properly trained to help you manage your debt.

Does debt counseling hurt your credit?

Your credit score won't be impacted directly by debt counseling, and simply signing up to learn about your options won't show up on your credit report. Of course, any actions you take as a result of advice from your debt counselor can affect your credit score. This is why it's important to seek a certified debt counselor and ask them to explain how your credit will be affected every step of the way.

If you decide to undergo a debt management plan as part of your debt counseling program, this will show up on your credit report in the form of a comment on each account that's part of your debt management plan. This is because debt management plans involve negotiating with your lenders and often altering your original agreement. These comments typically won't change your credit score, but future lenders will be able to see them.

However, if a lender, after negotiation through the debt management plan, decides to mark your account as settled, there will likely be a negative effect on your credit score.

The most important thing you can do for your credit while undergoing a debt management plan is to make sure you never miss a payment. If you don't understand exactly when your debt counseling organization will take over payments on your behalf, a payment could get lost in the transition, which could lower your credit score significantly.

Where to find debt counseling services

The best way to find a certified debt counselor who will put your interests first is to go through one of the two major nonprofit debt counseling organizations: National Foundation for Credit Counseling or Financial Counseling Association of America. Both organizations offer financial counseling with a focus on debt relief, credit report review and homeownership counseling. The U.S. Department of Justice also maintains a list of government-approved credit counseling agencies that can be searched by state.

The NFCC and FCAA are made up of a network of accredited member agencies throughout the country, so you can use either organization to find a certified, trustworthy debt counselor near you.

Take caution when seeking out debt counseling services

Scams and predatory practices are not uncommon, especially when dealing with financially vulnerable people. Never offer personal information or money before receiving information about the organization and what they do. If it feels like your debt counselor is pushing you into a debt management plan without educating you about other options, that may be a sign to seek counseling elsewhere.

Finally, debt settlement is not the same thing as debt counseling. Debt settlement companies are for-profit companies and often advise risky behaviors that can increase your debt load and hurt your credit.

Should you use debt counseling services?

Going through debt counseling with an accredited nonprofit agency can be a low-risk way to explore your options and get your financial situation under control. However, the decision to enter into a debt management plan shouldn't be taken lightly. While it can lower your monthly obligation and make your debt more manageable, debt management plans also have the following drawbacks:

  • You may have to pay a fee.
  • You could see a temporary drop in your credit score depending on the actions your debt counselor takes.
  • You might pay more in interest over time.
  • You might still not be able to afford your monthly payments.

Know that anything a debt counselor does for you, from negotiating with lenders to sending off your payments, you can also do yourself for free. That doesn't mean their services aren't worthwhile — a good debt counselor is experienced in negotiating with lenders and can save you time while offering invaluable financial education. However, it does mean you should weigh any monthly fees against the cost of doing it yourself.

You'll also want to reflect on whether or not your debt is truly unmanageable. If you can afford your monthly payments, it's often best to stick to your current plan. If you can't afford your monthly payments, make sure that you will be able to afford them under your proposed debt management plan before committing to anything.

Alternatives to debt counseling

There are several alternatives to debt counseling that can help lower your monthly obligation or pay off your debt more quickly. If you have good credit, you could qualify for balance transfer credit cards or a low-interest debt consolidation loan.

Balance transfer credit cards are ideal for balances you can pay off in a short amount of time. The best ones offer a low introductory interest rate (often 0%) for anywhere from 12 to 21 months. Once that introductory period ends, though, the interest rate typically shoots back up, so make sure you can pay off the balance before that happens.

Debt consolidation loans function similarly to debt management plans. You take out one large loan and use it to pay off your various accounts. From that point forward, you only have to make monthly payments on the debt consolidation loan. While this can make your payment schedule more manageable, it won't necessarily decrease your overall debt burden. If you have good credit, though, it could decrease your interest rate.

Balance transfer credit cards and debt consolidation loans can be excellent options for folks with good credit who want to save money on interest and pay off their debt more quickly. It also works best for people who are spending within their means and won’t rack up new debt after the transfer or consolidation. If you're struggling to make your monthly payments, or if you can't qualify for debt consolidation, it might be better to speak with a debt counselor about your options.

If you're struggling to pay off debt, educate yourself on your options and seek help. No matter how dire your financial situation is, there are always resources and routes to a better path.

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