Finance 101

What is Credit Counseling & How It Can Help

December 2, 2022

Have you heard about credit counseling but always wondered what it entails? Credit counseling is a service that helps people who have trouble managing their finances or their debt. A certified credit counselor will discuss your financial situation with you and may help you develop a personalized plan to help you with your money problems. 

Authorized credit counselors who conduct credit score counseling typically work for non-profit organizations. They will be certified and trained in the areas of budgeting, consumer credit, and money and debt management. 

Sometimes debt can be overwhelming and no matter how many budgets you try or financial mistakes you avoid, you just can't seem to get ahead of your bills. That’s the point where you may possibly consider credit counseling. 

How does credit counseling work?

If you think credit counseling could be for you, here's what you can expect:

Credit counseling can be done over the phone1 or in person and should only take about 30 to 60 minutes2 for the initial consultation. When you meet with a certified credit counselor, be prepared to discuss your income, your current debts, your monthly expenses, any credit card balances (and details about the APR on each card), and any other debts you may in order to give your counselor the full picture. Also be sure to share with them your financial goals.

You'll most likely need to authorize your credit counselor to run a credit check so that they can have an accurate view of your finances. A credit report will show them not only your credit score but also if you have any collections or other items you may not have known about or even considered.

Once the counselor has all the information he or she needs, they will recommend the best way for you to move forward. They'll work with you to figure out a plan for paying off your debt and in what timeframe. This can include helping you create a budget, an action plan to stick to the budget, and/or refer you to some debt management programs that can help your situation.

Benefits of Credit Counseling

Credit counseling has many benefits, such as: 

  1. Help you manage your debt. Credit counselors will look at your debt-to-income ratio and help find areas in which you can improve your situation. They can work with you to take a closer look at your finances and find costs that can be cut and other areas you may have overlooked.

  2. Help you create a debt management plan. As part of your debt management plan, they may help you create a monthly budget that you can follow with an accompanying action plan to help you stick to it. Credit counselors may also help you enroll in a debt management plan for further help or give recommendations for debt consolidation services. These options may help you lower your monthly payments to certain creditors.

  3. Help you become financially literate. Some credit counseling services offer free resources you can use to learn more about your finances. In utilizing these resources, you can learn to avoid making the same financial mistakes in the future. You may also learn more about how best to save money, create (and stick to) a budget, and plan for the future. 

Types of credit counseling services

There are several types of credit counseling services that your credit counselor may recommend.

  1. General budgeting. You may need help with general budgeting. Credit counselors can work with you to develop budgeting techniques, taking into account your financial goals and current financial situation. You'll discover ways to live within your means while you pay off your debt.

  2. Debt management program. In a debt management program, your credit counselor will typically make a plan to lower your interest rates and consolidate your debts with the hopes that you are debt-free in three to five years. Debt management plans may also help you lock in lower interest rates so that you can get out of debt more quickly.

  3. Student loan counseling. If your major source of debt is student loans, a credit counselor can look into these debts specifically. They can help you speak with your loan issuers to see if you can lower your interest rates or consolidate your loans if possible. 

  4. Housing counseling. Similar to student loan counseling, credit counselors can help you with housing issues, such as having trouble paying your rent or difficulty buying a home as a first-time home buyer.

  5. Bankruptcy counseling. For people who have tried and failed at all other means of debt relief, you may be counseled to file for bankruptcy to eliminate debt burdens.

FAQs: Credit Counseling

What does a credit counselor do?

A credit counselor takes a broad look at all your finances and makes recommendations as to how you can get out of debt. Credit counselors work for accredited agencies and can help you come up with a debt management plan for getting control of your finances. They also can recommend strategies such as budgeting, debt management, or even bankruptcy, if necessary.

Does credit counseling hurt your credit?

Does credit counseling hurt your credit? While an initial credit check by a credit counselor should not affect your credit (those are considered "soft" inquiries), other results of credit counseling may hurt your credit score. 

Debt management plans may require you to close some accounts, which may affect your credit score and your overall credit history length. 

Student loan consolidation may actually can help boost your credit score if you were to use the extra money you have from consolidation to pay off other debt, which in turn reduces your overall debt. 

Bankruptcy is very disruptive to your credit. If bankruptcy is your only option, know it stays on your credit report for seven to 10 years, depending on the type of bankruptcy you file.

What kind of accreditation should you check for in your credit counselor?

Credit counselors should be accredited by a national trade organization such as the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC). 

Legit credit score counseling will require no upfront charges and won't charge for educational materials or workshops. They should not push you into a debt management plan right off the bat or push a one-size-all solution. They should tell you about all solutions available to you and let you choose the one that works best for you. You can check with the Better Business Bureau if you're not sure if a credit counseling agency is accredited or not. 

Should you need a credit counseling agency for pre-bankruptcy counseling, you can check the US Department of Justice's list of approved credit counseling agencies.

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