What is Consumer Credit Counseling and How Does It Work?

Dayton Uttinger
credit counseling

You know that you’re supposed to put a portion of your paycheck in savings every month, just in case of an emergency. You’re also supposed to save for your kids’ college fund and for your own retirement, but all of these feel impossible when you’re struggling to even pay your bills on time. Maybe you’ve decided you’re done with this cycle of stress, of constantly checking your bank account, and repeatedly being denied whenever anyone checks your credit. You’re intent on leaving that life behind you, and maybe you’ve already made progress as far as creating a budget, but where do you even begin with your credit?

You’ve probably heard that raising your credit is a long, difficult process. How is someone with minimal financial resources supposed to do it, then? Well, plenty of people turn to professionals for advice. The right credit counselor can help you not only get back on your feet, but get a running start.

Table of Contents

What Is Credit Counseling?

Credit counseling is basically a crash course in personal finance management. It is a way to understand the basics, and begin to lay a stronger foundation for your own money management and spending habits. Your credit can truly improve if your finances overall improve, but some people lack the financial literacy necessary to make meaningful progress on their own. Credit counseling is one way to change that.

What Does A Credit Counselor Do?

Credit counselors will look at your income and your expenditures. They’ll work with you to create the best possible plan, and perhaps direct you to a workshop or some free resources. A first session typically lasts about an hour, but it is important to note that you’ll only take away what you’re willing to put in. You’ve got to be completely upfront with your credit counselor, or despite their certifications in credit management, they won’t be able to come up with the best plan possible.

Many of the resources and information that credit counselors provide is available for free on the web, but it’ll be much easier to locate that information with the help of a professional. They provide context and teach you how to use these resources and information, not just tell you where to find it. Plus, you’re not only benefiting from the resources, but from their expertise. Many credit counselors are even non-profit organizations, dedicated to helping improve financial literacy in the public.

Does Credit Counseling Improve Your Credit Score?

Because that’s really the question that’s on your mind, right? Will credit counseling help you get out of the rut you’re in?

The truth is that there isn’t an easy answer. It’s going to depend entirely on your personal financial situation. If you provide all the relevant information to your credit counselor, are capable of keeping to a budget, and follow their advice, then credit counseling absolutely can be a way out. Enrolling in a Debt Management Plan, which might sound sketchy at first, is a perfect move for some, because it forces you to put money towards your debts. Furthermore, some lenders will lower your interest rates once they find out that you’re working with a credit counselor.

On the other hand, credit counseling is not a money generator. It is a solution for people who are having problems managing their money, not necessarily those who just don’t have enough. If you are having problems putting food on the table, credit counseling might not give you the answers that you’re hoping for. If, however, you’re struggling to pay bills on the time, it could be a definite solution.

Should You Get Credit Counseling?

While anyone can benefit from the services of a credit counselor, some people are better candidates than others.

If your credit and finances are suffering as a result of identity theft, you might actually benefit more from credit repair. Credit repair professionals can help more with inaccuracies on your credit report, less so with factual credit history. You’ve had bad luck and made a few mistakes, but that doesn’t mean that your credit history can be removed. If you’ve just found yourself up a river without a paddle, credit counseling might be a better fit.

Credit counseling will be the most helpful to people who are ready to turn over a new leaf and willing to to take the advice of a professional. Creating a sustainable budget sometimes requires some sacrifices, but taking credit counselors’ advice will benefit you in the long run.

Should You Pay for Credit Counseling Services?

Although most credit counselors are there to help you, it’s important to note that not all credit counselors are what they seem. Some of them are a scam, and you need to pay attention if you don’t want to be taken advantage of.

The Department of Justice keeps a list of pre-approved credit counseling agencies. Any agency on that list is approved to provide the obligatory credit counseling that you must complete before filing bankruptcy, and they also have nonprofit status. Regardless, you should still ask some basic questions of all credit counselors, so that you can determine their legitimacy and know what’s expected of you a little more.

If you discover any of the following about a credit counseling agency, get up and get out of there.

  • They require a “voluntary donation” before they can work with you.
  • They push you towards a Debt Management Plan (DMP), a plan where you deposit money with the counseling agency and they pay your bills for you. This plan can be a good idea for some, but if it’s their only option, run.
  • Their educational materials require an upfront cost. There are plenty of finance education materials available for free, so there’s no reason you’d have to pay for them from a legitimate agency.
  • They want you to commit to something over the telephone. Only agree to terms in writing, and read them all before you sign anything!

Ultimately, if you have any doubts, find another credit counselor. Refer to the list referenced above and the Better Business Bureau’s rating. You’re there to learn how to best manage your money, so it’s important that you feel comfortable with them.

Still wondering how your credit score is calculated? Visit our credit score resource center for more information.

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